Thursday, July 22, 2010

Secure the space you can't yet afford

I'm currently engaged in multiple transactions in which a buyer has found THE property they want to buy but they're not financially ready to secure the commercial mortgage they need.  The problem in some cases is that if the buyer simply goes away with plans to tie it up when they're ready, the building may be sold out from under them.  In other cases, the building plays an important part in raising the funds to pay for the building.  There are creative solutions to this scenario so long as a couple of key components are in place.

The key components are critical:
  • the buyer must have a definite and convincing plan for paying for the building by a certain date, and
  • the buyer must be willing to risk monetary loss if they don't get to that financial place.
How does this work?  I'll share three stories here.

Story 1: Needs space now to meet an existing demand
I represent a buyer who has clients teed up and waiting but is unable to meet that demand without a space in which to conduct business and meet with clients. These clients will spend hundreds of thousands of dollars per year for the buyer's services, with great operating margins. 

The buyer isn't able to secure a commercial mortgage because they've been investing heavily to get to this point and this new media company hasn't been around for years to have an operating history.  And the buyer doesn't want to lease because technology installations make a relocation unattractive.  Plus, they strongly prefer to own and they know now is a great time to lock in a purchase price.

This buyer finds the perfect space... it's vacant and available for sale only at a steep discount.  Now what?  The seller is expecting a purchase offer with earnest money and a 60-90 day close period. The buyer can do earnest money but not the loan.

The answer is a lease-purchase agreement with a build-up of earnest money.  The seller leases the property now and puts down a standard lease security deposit.  This arrangement covers the seller's costs in the short term.  At a certain point in the lease - after the buyer has recovered from relocation costs - an earnest money payment is added to the rent.  This earnest money is accumulated over X months and will be applied to the purchase price at closing or will be forfeited if the buyer doesn't complete the purchase in a set time period.  The buyer should also be prepared to convert the security deposit to additional earnest money if the sale isn't completed.  This twist gives the seller security from day 1 and will help motivate the "recovery" period before the earnest money payments kick in.

This arrangement works because (1) it covers the seller's costs on the vacant space, (2) it compensates the seller for lost sales exposure if the buyer doesn't buy, and (3) if the buyer doesn't buy, the seller is certainly looking at a more favorable market in a couple of years.

Buyer 2: Needs space later and needs to raise funds
I represent a seller in a transaction in which a buyer had accumulated a good sum of money (6 figures) towards a building purchase, but this sum didn't cover the equity needed to secure a commercial mortgage.  As a charitable organization, this buying organization needed to raise funds to complete the purchase but they needed a "poster building" to attract donations. 

The buyer found the absolute perfect building (my client's).  The building was occupied by the client but the client would vacate upon sale.  The significance of the occupancy is that the seller was covering the operating costs through their own business use.

What the buyer did was to provide their entire warchest as earnest money to secure the property.  They then went through a standard inspection period followed by an unusually long closing period of several months.  They used these months to promote the vision and show the property to donors.  It was a gutsy move because their warchest was nonrefundable at the end of the inspection period, but they've flourished in their fundraising and they'll soon be proud owners of a great new headquarters building.

Story 3: Needs space now, Business windfall later
In a huge gamble, a startup production company needed a building in which to do television filming and other production-related work.  As with Story #1, they anticipated a huge payout once the business was up and running, but they couldn't get the business up and running without a facility - a very large on in their case.  What they did was similar to story #2, except they did it with a vacant building.  They made a full-price offer, put up an unusually large amount of earnest money to secure the building, and then scheduled the closing 12 months out.  With a seller who doesn't need the space themselves, this is a great solution.  Once the earnest money goes hard it covers a good portion of the expenses for a year.  If the buyer doesn't buy, the seller gets back an improved building that's been customized for a rapidly-growing industry in Georgia.  And most importantly, if the buyer doesn't buy the economy will be one year farther through the recession!

These are only three of many creative solutions to problems of this type.  Feel free to call if you're in a similar situation... I'd love to help!

Friday, July 9, 2010

Data Center – Solo or Colo?

So you need a new data center. The question is, “Should I build my own or go with a collocation facility?” The answer: it depends.

There’s no denying that the demand for data center space is on the rise. The world is becoming increasingly digitized through trends such as mobile computing, cloud computing, social media, email proliferation, HIPPA, and IP Voice applications. The most recent “wow” statistic I heard was that corporate data storage demand will increase by more than 650% over the next 5 years. And all of that data has to reside somewhere.

I get frequent calls from organizations who want a space that includes a data center or that is primarily a data center. Their hope is that they’ll find a move-in ready space and dodge the data center build expense. To be honest, they can dodge a tremendous part of the expense… an existing vacant data center will have power and cooling systems, fire suppression system, power and data feeder reliability (probably), raised floor (if applicable), a generator, and possibly racking and wire management, saving them tens or hundreds of thousands of dollars. The part that surprises is that 2nd generation (aka pre-built vacant) space will likely require them to lease more space than anticipated or be prepared to spend large sums modernizing a the power and cooling systems.

2nd generation data center space will almost always have been built more than 5 years ago. The miniaturization of electronics during that time has allowed manufacturers to fit more gear in less rack space, resulting in much higher power consumption AND heat generation per square foot of data center space. It’s entirely realistic that a 2nd generation space will need 2-3 times that of what the 2nd generation space was built to provide. OR a user will need to spread out their gear so that they don’t overload the power and cooling systems, resulting in them having to lease more space than they really need. If either of these scenarios is acceptable, then solo may well be an option.

There is a challenge with finding 2nd generation data center space… it’s not always well-promoted, and there are varying degrees of accuracy in what is conveyed. Non-technical real estate agents don’t always realize the value such facilities offer, so they don’t promote them when they’re part of a larger space. They ARE out there, they’re just not promoted (click here for a blog entry listing such spaces in Atlanta). Regarding accuracy, I’ve personally had agents tell me that something is a 2nd generation data center even when it’s been completely gutted!

For those lacking the capital or expertise to update (or build) their own “solo” facility, collocation is a great option. There are over a dozen facilities around metro Atlanta alone that are move-in ready, offering turnkey solutions to meet any need. Whether you need to host your web site in someone else’s server, need a few rack units to locate your own server, or need a caged area that’s totally yours, these providers can accommodate you. You’ll get connectivity, physical security, primary and backup power, cooling, and constant improvements… all at the hands of another. And while their dollars per square foot equation will look high, I regard it to be a sound investment.

A few of Atlanta’s collocation providers include (in alphabetical order to be fair!) AT&T, Colocube, InterNAP, Level3, MCI, Peak10, Quality Technology Group, SAGO, SAVVIS, SunGard, TelX, TW Telecom, NationalNet, Xilogix, XO, and others. Each has its own facility type and “sweet spot,” so you’d still be wise to engage someone who can narrow the list depending upon your need.

Next Step
Your best next step is to engage a commercial agent who can understand your needs and drivers and who is aware of what the solo and colo markets have to offer. If a good 2nd generation option is there, they’ll be able to find it. If your needs point to colo, they can pair you with the best 2-3 fits and provide their own insight along the way.

I’d love to be that resource… call or email anytime!