A Real Success Story

Everybody likes a good story. Some are good because they teach us a good lesson or help us change the way we think or act to improve the quality of our lives. 

Recently, we completed a transaction for a friend and long-time client that we think makes a pretty good story and teaches a pretty darn good lesson, too. It goes something like this:

Ted bought a 5,200-square-foot industrial building in central Orange County 26 years ago to operate his precision machining business. It had the power he needed, the yard he wanted and it was close to his home in Lemon Heights. At first he was swimming in the space, but the business grew steadily through the years and he realized a couple of years ago that he would soon need to find a new building. 

As a manufacturer, he knew it was going to be expensive to move, and only wanted to do once before he retires and turns the business over to his sons. He already had his eyes on Arizona as a retirement destination and he was becoming increasingly disillusioned with the business climate in California. So he decided to take a hard look at moving the business there, too. His sons and most of his long-time employees were all on board with the idea.

He had already bought a second home in the Phoenix area two years ago and decided to lease a small space to open a second location for his business. Being the cautious guy that he is, he wanted to make sure there was ample opportunity to find new business out there and still be able to complete jobs remotely for existing clients back here in California. The experiment worked even better than expected, and in early 2020 he set a goal to move the entire operation to Arizona by end of 2022, which would involve selling his building in Orange County and exchanging the proceeds into a bigger building in Arizona. He even put a deposit down on a to-be-built building that was scheduled for completion by around that time.

With that plan in the works, he refocused on growing the business in both locations to make sure he had good momentum before making the move. Everything was falling in to place just as he had hoped. That is, until we told him about the new administrations plan to repeal 1031 exchange rules and tax capital gains at ordinary income tax rates. If either or both of those things actually happened, it would have unraveled his whole plan.

Since the move to Arizona was going to happen anyway, we advised him to move up the timeline and execute the plan as soon possible so that he could complete his exchange into a new facility before any changes to the tax code could take effect. While we were preparing his property to go on the market here in Orange County, he began an intense search for a new location in Phoenix. Fortunately, he found an existing building that was perfect for his business; a freestanding 11,000-square-foot building with good power, a large yard and located right down the street from one of his biggest customers.

Securing that facility wasn’t easy, though. He had to compete with several other qualified buyers and offer well above the asking price to be the winning bidder. Fortunately, he had the advantage back here in Orange County. We received three offers on his building in two days, all at a record price point. After less than a day of negotiations, we were in escrow with an all-cash buyer willing to close in time to complete the exchange into the Arizona property without an expensive bridge loan to complete a reverse exchange.

The result: Ted sold his building here for well north of $300 per square foot and exchanged into a building twice the size for under $175 per square foot. Since he owned the Orange County building outright, he reinvested all the proceeds into the new building and took out a small mortgage with a $1,800 monthly payment, less than the rent he was paying for his small lease space that he no longer needs. The buyer of the building in Orange County even agreed to a short-term leaseback so that Ted could make his move in stages to limit downtime for the business.

We think this is a great story for many reasons, but the main takeaway is the fact that Ted was willing to make adjustments to his strategy based on current and expected events. He is now fully operational in Arizona, owns a building that exceeds his expectations and his employees are thrilled to be part of the adventure in an area where they may also be able to buy homes and improve the quality of their own lives in an area that has a lower cost of living. If this doesn’t define a win-win scenario, we don’t know what does.

If Ted’s story strikes a chord, maybe we can help you, too. Just give us a call.