Category Archives: Note

A brief writing. Industrial real estate related.

Types of Industrial Buildings / Properties Explained

Industrial Property Types

Industrial is one of 4 commercial property types (industrial, retail, office and multi-family) and is a broad category encompassing many different types of buildings. Here are brief descriptions of eight major industrial property types:

Warehouse/Distribution Buildings

Warehousing & Distribution buildings are very large, single-story structures used primarily for warehousing and the distribution of business inventory. These buildings range from 5,000 to hundreds of thousands of square feet under roof and have up to 60-foot ceiling heights to accommodate extensive racking and storage systems. These buildings may have a small amount of office space as numerous loading docks, truck doors and large surface parking lots to semi-trailers. Some buildings may be served by rail cars.

Manufacturing Buildings

Manufacturing facilities (also called heavy industrial buildings) are designed to house specialized equipment used to produce goods or materials. In addition to providing three-phase high capacity, electric power, these industrial properties may include heavy ductwork, pressurized air or water lines, buss ducts, high capacity ventilation and exhaust systems, floor drains, storage tanks and cranes. A subset of this is food manufacturing which often includes refrigeration, clarifiers, boilers, sloped floors for drainage, and other specialized food facility equipment.

Refrigeration/Cold Storage Buildings:

Refrigeration/Cold Storage are specialized industrial buildings that offer large capacity cold storage such as cooler (34 deg F) and freezer (-10 to 0 deg F) rooms. They are often used as a distribution center for food products such as meat, produce, prepared meals, dairy, etc…

Telecom / Data Hosting Centers

These are highly specialized industrial buildings located in close proximity to major communications trunk lines with access to an extremely large and redundant power supply capable of powering extensive computer servers and telecom switching equipment. These buildings have reinforced floor slabs capable of supporting the weight of the electrical and computer equipment as well as backup generators, and specialized HVAC. They may also include raised flooring to handle cooling and extensive cabling. These buildings may also be called Switching Centers, Cyber Centers, Web Hosting Facilities and Telecom Centers.

Flex Buildings:

This versatile building type (short for “Flexible”) covers a broad range of uses and often is used to combine one or more uses in a single facility, including office space, research and development, showroom retail sales, light manufacturing research and development (R&D) and even small warehouse and distribution uses. Because of this versatility, flex buildings are sometimes listed as separate category. Flex buildings typically have ceiling heights under 18 feet and have a higher percentage of office space than larger industrial buildings.

Light Manufacturing Buildings:

Flex buildings can be used for light manufacturing that do not require extensive physical plant and space requirements that heavy industrial buildings provide; such as light assembly.

R&D Buildings:

Flex buildings are popular in high technology industries such as computers, electronics and biotechnology because they effective support a hybrid of office, manufacturing and warehouse space housed in a single location. Often these types of space users prefer locating in campus-like business parks featuring extensive landscaping, shared architecture design, and lots of surface parking and open space.

Showroom Buildings:

Similar to flex/office buildings in basic construction and layout, showroom buildings combine retail display space with extensive onsite storage and distribution. Typically up to 50% of the interior space in showroom buildings is dedicated to sales.

Biotech (Wet Lab) Buildings:

Biotech buildings are highly specialized flex buildings that support a range of laboratory space where chemicals, drugs or other material or biological matter are tested and analyzed. This type of building requires extensive plumbing and water distribution, direct ventilation and specialized piped utilities. In addition, some may offer accurate temperature and humidity controls, dust control, and heavy power. Often these types of buildings are located together in campus-like fashion with extensive landscaping, extensive surface parking and open space.

Brief History of The Citadel, City of Commerce

In 1929, architects Morgan Walls and Clements (Mayan Theater) built Commerce’s most recognizable landmark, the Assyrian-themed Samson Tire and Rubber Co. factory before being shut down in 1978. The city bought the Samson site for $14 million in 1983. Seven years later, Trammell Crow Co. was brought in to oversee the $118 million redevelopment of the site into an outlet center, as well as the construction of a 201-room Wyndham Garden Hotel next door.

When the partnership defaulted on its ground lease with the city in 1998, Commerce officials took back the center and began marketing it to firms that would double its retail size and make it competitive with newer outlet malls in Southern California.

Craig Realty bought the Citadel Factory Stores from the City of Commerce for $50 million in July 2002, with the condition that his firm would double the size of the retail center.  Craig Realty owns factory outlet centers in Cabazon, just outside Palm Springs, and Carlsbad. It also helped develop Camarillo Premium Outlets.

1031 Tax Deferred Exhange

There is a common misconception that all tax-deferred exchanges are complicated and require all properties, relinquished and replacement, to close concurrently. Fortunately, the most common exchange variation, the delayed exchange (also referred to as a deferred or “Starker” exchange, Starker v. U.S., 602 F.2d 1341), provides Exchangers with more flexibility and options in acquiring the replacement property than the simultaneous exchange. The delayed exchange begins when the Exchanger’s first relinquished property is sold and is completed when the last replacement property is acquired within the prescribed exchange period. To provide the required notice to the relinquished property buyer(s) and the replacement property seller(s) the Purchase and Sale Contract for each property should include an “exchange cooperation”.

The standard industrial / commercial real estate purchase agreement that we use in our sale transactions in Los Angeles County has standard 1031 Exchange language.

The use of a Qualified Intermediary (also known as an “Accommodator” or “Facilitator”) is the most common method used to complete a valid delayed exchange quickly and easily. The Qualified Intermediary is an independent party to the exchange transaction, who performs the function of creating the reciprocal trade of properties for the exchange, holds the exchange funds and supplies the necessary exchange documents, such as the Exchange Agreement, Assignments and Closing Instructions. The Exchanger assigns the rights in the Sale Contract for the relinquished property and in the Purchase Contract for the replacement property to the Qualified Intermediary, who essentially becomes the “seller” of the relinquished property and the “buyer” of the replacement property. To avoid actual or constructive receipt of the exchange funds by the Exchanger the proceeds from the sale of the relinquished property are held by the Qualified Intermediary until they are needed for the acquisition of the replacement property. In both simultaneous and delayed exchanges in which a Qualified Intermediary is used to create the reciprocal exchange of properties the IRS allows “direct deeding” of the relinquished property from the Exchanger to the buyer and of the replacement property from the seller to the Exchanger, thereby avoiding the necessity of the Qualified Intermediary holding title to any property. Revenue Procedure 90-34, 1990-1 C.B. 552. Direct deeding avoids the assessment of double state, county, or local documentary transfer taxes and any liability on the part of the Qualified Intermediary for environmental hazards that may exist on the property.

The Treasury Department issued Regulations in 1991 that clarified the acceptable methods to properly identify replacement property. See Treas. Regs. §1.1031(k)-1(b)-(e). First, the Exchanger must receive all replacement property within the earlier of 180 days after the date on which the Exchanger transferred the first relinquished property, or the due date (including extensions) for the Exchanger’s tax return for the tax year in which the transfer of the first relinquished property occurs. Second, the Exchanger must identify the replacement property to be acquired by the end of the Exchange Period within 45 days of the transfer of the first relinquished property. These time periods are very strict and cannot be extended even if the 45th day or 180th day falls on a Saturday, Sunday or legal holiday. The proper identification of replacement property is critical and if not made in a timely manner the exchange fails and the entire transaction is taxable. The rules are as follows: (a) the replacement property identification must be in writing and signed by the Exchanger, (b) it must be delivered by mail, fax or hand delivery to a party to the exchange transaction (usually the Qualified Intermediary) by midnight of the 45th day, (c) the replacement properties must be unambiguously described, such as by a street address, tax lot number, legal description or the like, and (d) the Exchanger may list up to three properties of unlimited value, but if more than three properties are listed, their total aggregate fair market value may not exceed 200% of the aggregate fair market value of the relinquished property. It is essential in a delayed exchange to adhere to these rules and deadlines established for identifying and acquiring the replacement property. Failure to comply with these rules may result in a failed exchange.

Choosing a Legal Business Entity: Corporation, LLC or Sole Proprietorship?

Choosing a legal business entity is one of the biggest decisions a small business owner will make. When deciding on an entity, one should consider the exposure of personal assets to liability, potential tax advantages, the ability to transfer ownership and the management structure desired.  When leasing or buying an commercial warehouse or manufacturing building, your business entity will be placed either on the lease form as Lessee, or it will hold fee title to the property you buy.  On the flip side, landlords often use LLC’s to hold title to industrial properties in Southern California and Los Angeles.  The LLC is now the favored holding entity for commercial real estate.  Here is a primer on the most common entities:

Sole Proprietorship: If a business is owned by one owner and is not incorporated, it is a sole proprietorship, which is a simple and inexpensive way to conduct a business. It’s also the most prevalent type of small business in the country. The owner is taxed on individual tax returns. The big drawback with sole proprietorships is that the owner is fully liable for business obligations, meaning that personal homes, cars and savings can be pursued by creditors.

Limited Liability Company: As liability increases, business owners should consider a limited liability company, which can cost between $200 and $250 to set up. LLCs protect owners from individual liability, while still allowing the owners full or limited management rights as they desire. As a separate legal entity, an LLC can own property, incur debts, enter into contracts and be a party to civil actions. LLCs offer several taxing options. If the LLC has two or more members, the entity can choose to be taxed as a partnership or a corporation. An LLC that elects corporate treatment may opt for S corporation treatment. If no election is made, the IRS will tax the entity as a partnership.

Partnerships: Partnerships consist of an association of two or more persons who have not incorporated and carry on a business for profit as co-owners. Partnership arrangements are flexible, allowing partners to split ownership and profits however they wish–general partnerships, limited partnerships or a limited liability partnership. General partnerships can be formed without any formalities. General partners are liable for the obligations of the partnership, and each partner can bind the partnership contractually with third parties. A limited partnership requires at least one general and one limited partner, with the limited partner having no management responsibility. Limited partners are liable only for the money invested in the partnership, while the general partner remains liable for all partnership obligations. Through their individual tax returns, partners pay taxes on their interest in the partnership’s profits and losses.

Corporations: Corporations are advantageous because they shield personal assets, allow free transfer of ownership and ensure continued existence if a shareholder dies or leaves. A corporation is a separate legal entity that can own property, sue and be sued, and has status as a separate taxpayer. To organize as a corporation, articles of incorporation must be filed with the state. Corporations must also establish bylaws, issue shares and hold annual meetings. Ownership is through stock, which can be categorized in different classes and freely transferred. Corporations can be taxed either as C corporations or S corporations, which refer to their respective subchapters in the Internal Revenue Code. The S corporation does not pay taxes; instead, the income and deductions pass through to the shareholders, who are taxed on their individual tax returns. A C corporation pays tax on its net taxable income, but shareholders must also pay tax on dividends they receive. C corporations can obtain tax deductions for business expenses, which are not available to other entities.