Archives for December 2007

Staff Spotlight: Lee Jatta

Staff Spotlight: Lee Jatta

In this issue of the Insider, Borelli’s Staff Spotlight introduces you to Lee Jatta, one of the many professionals in Borelli’s property management department. Dedicated property managers like Lee ensure that each property is managed to maximize its long-term value for the owner, while promptly responding to tenant needs. Lee’s decade of experience and commitment to tenants and owners is what makes Borelli Investment Company the first choice for small to medium-sized property owners in Silicon Valley.

Tenants know they can count on Lee to get things done

Experience:
Started with Borelli Investment Company in 1995 in accounting. Moved to the property management department in 1996. Primarily supported Oakmead Terrace-a landmark office project in Sunnyvale-for many years, but has also managed other office, industrial, and retail properties in Silicon Valley.
Responsibilities:
Responds quickly and effectively when maintenance issues arise-such as plumbing, heating and air conditioning problems; burned-out lights, or tenant lock-outs. Also manages tenant improvements to meet all space requirements and conform to city codes.
Business Philosophy:
“I try to be prompt, efficient, and fair to all the parties involved. My goal is to be highly professional at all times, and courteous and conscientious in my dealings with everyone.”
Secret to Success:
“Lee is a very detail-oriented person,” said Tom Purtell, Chief Operating Officer of Borelli Investment Company. “He does not cut corners, nor miss deadlines. Tenants know they can count on Lee to get things done.”

Borelli Investment Company Announces New Syndicated Investment Opportunity

Borelli Announces New Syndicatd Investment Opportunity

Although the nation’s housing market has cooled somewhat lately, Silicon Valley’s housing market remains strong, driven by a rapidly improving job market. Demand is particularly high for housing that is more affordable, targeted to first-time homebuyers. That’s what makes Borelli Investment Company’s new syndicated investment opportunity in affordably priced production housing in Sunnyvale so intriguing.

A Quality KB Home Townhome Community in Close-In Sunnyvale

KB Home is the largest new homebuilder in California, and one of the top five builders in the U.S. The company is planning to build a small community of 80 townhomes in an ideal close-in location near Lawrence Expressway and Monroe in the heart of Sunnyvale. The townhomes will be in close proximity to thousands of high-tech jobs, near major transportation arteries, and easy walking distance to a CalTrain station. Although actual prices have not yet been determined, the townhomes will be at the affordable end of the spectrum for Silicon Valley. With the added fuel savings due to shorter commutes, the new community should be just what many homebuyers are looking for.

Borelli Investment Company plans to raise $5 million in equity capital to participate in a joint venture with KB Home. Interested individuals will be able to invest in $100,000 shares, with a projected annual return of 12 percent over the expected 18 to 24 month holding period for the fund.

“Silicon Valley is very constrained on its housing,” said Ralph N. Borelli. “We have natural geographic boundaries that limit our expansion, and the conversion of outdated industrial properties to housing has been slowed recently by city planners, who are protecting their industrial base to take advantage of the recovering job market. As a result, demand remains very strong for this type of entry-level housing in Silicon Valley.”

All entitlements have been cleared for the KB Home community and necessary approvals have been obtained, so once the tenants have vacated the four older industrial buildings currently on the property, the project will be ready to proceed.

This is not an offer to sell, nor a solicitation of an offer to buy shares in the BIC-015, LLC-Aster Avenue Associates fund.  Investment shares in the fund are offered only in conjunction with the offering prospectus.  Please read carefully before you make any investment decision, and consult with an investment professional for advice and guidance regarding your personal financial situation.

The Pitfalls of Doing Your Own Property Management

If you currently own or are considering the purchase of commercial real estate, you are probably well aware there are a number of tasks that must be handled on a regular basis. Space has to be leased, rent collected, the property maintained, and repairs performed as required.

Many individual owners—especially those who own from one to a handful of properties—seem to prefer to manage these tasks themselves. But this often stems from a mistaken notion.

“It’s difficult for some commercial real estate owners to understand the value of professional property management,” said Buddy R. Parsons, president of Borelli Investment Company. “These owners may think, ‘Why should I pay people to collect rent checks, mow the lawn once a week, and do the occasional repairs?’ Not surprisingly, there’s a lot more to it than that.”

According to Parsons, the benefits of professional property management fall into three general categories:

  • Protecting you against undue risks
  • Reducing your operating expenses
  • Increasing the value of your assets

Minimizing your Liability

All investments involve market risk—the possibility that an investment may decline, rather than increase, in value over time due to market forces. However, for commercial real estate investments, there are other concerns that can pose just as much risk to you.

To minimize this liability, professional property managers work to ensure that all parties involved with a property—you, your tenants, and any vendors who may provide maintenance services for the property—are adequately protected by insurance. Property managers take a systematic approach to reviewing these coverages—regularly checking to ensure that insurance remains in full force and effect, and has the proper coverages and endorsements to protect you in the event of loss.

In addition to managing your insurance, property management firms can offer owners the advantage of buying policies as part of a larger group of properties handled by the firm. The portfolio is bid on a competitive basis, and this can significantly decrease the premiums an owner might have to pay if buying insurance individually.

Reducing your Operating Expenses

When property owners handle their own repairs and maintenance, they often unwittingly assume a high degree of risk. To control costs, they may pay a handyman in cash, or search for the lowest-priced contractor. In many cases, they don’t cover maintenance people against accidents through workers’ compensation insurance, and they don’t insist on liability coverage to protect themselves against shoddy workmanship, delays or unfinished projects.

“These owners think they’re reducing the costs of managing their buildings, but it only takes one problem or accident to wipe out all the potential savings and a lot more,” Parsons explained. “They’re strictly relying on luck.”

Professional property managers reduce operating costs safely and methodically. These firms establish long-term relationships with highly qualified and reliable vendors that do all the needed work for repairs or upgrades. Because of these relationships, and the high volume of work these vendors receive, they often charge more favorable rates, as well as provide rapid response to “emergencies” such as a leaky pipe or a broken window—even after hours or on weekends. And, if a job isn’t done right, the property company’s history with the vendor ensures that you’ll get the satisfaction you deserve.

Property management companies also employ systems to collect rent on a timely basis, deal effectively with slow or missed payments, and reconcile the building’s operating expenses, so you can recoup your costs by charging each tenant a fair share.

Increasing your Asset Value

The third area where professional property managers provide substantial benefits is asset value.

First, a third-party manager looks at rents without the emotionalism of an owner-manager, who may feel “loyal” to his or her long-time tenants. The top-flight professional also doesn’t avoid raising rents due to a fear of losing tenants. Often, owners actually fight against rental rate hikes, believing that if rents are raised, tenants will leave, and their building or buildings will fail.

Actually, the opposite can be true. Experienced property managers know that if they have done a good job of analyzing the market and establishing fair-market rents, the loss of one tenant will easily be replaced by another—at higher, market rents. Achieving and maintaining the right level for rents is a key to enhancing a building’s long-term asset value.

Second, a professional property management firm should have an effective marketing group to advertise and promote its portfolio of properties to a large group of potential tenants, as well as commercial and residential brokerage firms. This creates higher demand, which leads to rising occupancy and better returns on your investment.

Borelli Provides Unmatched Property Management

For more than 50 years, Borelli Investment Company has provided a variety of real estate services to owners in the Silicon Valley and beyond. Among these is the first-rate, highly professional third-party property management that helps owners reduce risks, lower operating expenses and continually increase asset values over time.

Borelli often goes beyond traditional property management to provide complete asset management that includes:

  • Investment analysis
  • Land acquisition
  • Construction
  • Financing
  • Development

“We participate in the really important decision regarding properties,” stated Parsons. “These decisions include how to leverage properties within a portfolio to provide the highest benefits, how and when to renovate or add onto properties, and when the time is right to dispose of a property. Many of our clients enjoy the real advantages of receiving professional property management within the larger context of comprehensive asset management.”

For the past three decades—through market upswings and downswings—Borelli has maintained a remarkable occupancy rate of more than 95 percent across its portfolio—which has grown to more than four million square feet valued at $500 million. Borelli has also been very successful at doing the little things that add up to make a big difference for owners.

“Many owners won’t bother to try to re-bill operating expenses to tenants,” Parsons commented. “Their reasoning is that it’s too complex and not worth the effort—plus, they think they can just ‘pack it’ into the rent. But the reality is a lot of money gets left on the table—the owner’s money. We have a very good track record of being able to apply systems to efficiently get this money from tenants, and it is often enough to completely pay for us as a property manager, while putting more money in our owners’ pockets and providing the many other benefits of professional property management.”

Borelli’s aim is to take the burden of property management off of you—the smaller individual owners—so you can enjoy your free time seeing the world or relaxing with friends, instead of worrying about leaky pipes or peeling paint. For more information about Borelli’s experienced, professional third-party property management services, contact Buddy Parsons at (408) 453-4700, or e-mail buddy@borelli-inv.com.

Commercial Real Estate Rents Rise Throughout Silicon Valley

Higher sales prices, shrinkin inventories, and growing construction costs are creating urgency for business looking for commecial space

 5-4-3-2-1 Liftoff!  That thundering you hear is the sound of lease rates on Silicon Valley commercial real estate leaving the launching pad and climbing back toward sustainable levels.  No one expects rents to go through the stratosphere, but after being exceptionally low for the past five years or so, lease rates on commercial real estate are due for a significant rise.  Business owners and property investors who are sitting on the sidelines trying to time the market would be well advised not to wait any longer.

Let’s turn back the calendar a few years to understand what is going on.  Following decades of steady appreciation in property values and healthy rental levels, the dot-com explosion of the mid- to late-1990s sent commercial real estate rents through the roof.  The belief that almost any idea involving the Internet was a money-maker created a tremendous demand for commercial space in Silicon Valley by venture capital-based dot-com startups.

But as so often happens, when the dot-com bubble burst in 2001, the overheated market cooled off quickly, driving rents down. Enormous amounts of inventory—at one point as much as 60 million square feet of space by some estimates—stood vacant. It was a renter’s market; companies leasing space felt they had the upper hand in negotiations with property owners.

Today, there are clear signs the commercial real estate market has come back into balance, after the rollercoaster ride of the past decade.

  • Lincoln Property just purchased the four-building, 15-acre former Acer Computer campus on Trimble Road in San Jose for $27 million—handing Apollo Real Estate a tidy $8 million profit on the property it had bought less than a year earlier for $19 million.
  • A joint venture between Westbrook Partners and Four Corners Properties just laid out $94 million for Montague Park in San Jose, providing the previous owners a $19 million profit in just 15 months.
  • Significant rent increases of up to 30 percent have taken place over the past 12 months—with the upward trend especially noticeable on incubator spaces of 5,000 square feet or smaller.

“The evidence is indisputable,” said Ralph Borelli. “Big real estate companies are buying again in Silicon Valley. The bottom of the market for commercial real estate in the Valley was most likely reached in 2004 or early 2005. The rebound began in earnest last year, and this is fueling the rise in rents now being felt throughout the Valley.”

Multiple Contributing Factors

What is causing the recent increases in property values and rents? In Borelli’s opinion, there are several contributing factors:

  • Strengthening job market—According to the Association of Bay Area Governments (ABAG), the South Bay experienced significantly stronger job growth than had been expected in 2006, increasing by 1.8%. The San Jose area outperformed California and the nation, and in fact only trailed the combined San Francisco/San Mateo/Marin area and Solano County in the creation of new jobs last year. ABAG expects the upswing to continue in 2007, with the South Bay predicted to add another 11,500 jobs—many in the technology sector.
  • Rapidly decreasing inventories—With the job market on the rise, planning departments have approved the conversion of obsolete commercial and industrial property into residential space. Perhaps 25 percent of the vacant standing inventory has been or will be torn down for new housing by leading homebuilders such as KB Home, according to Borelli. At the same time, big-name businesses such as Google, Yahoo, and Apple have collectively purchased millions of square feet of space over the past several years—effectively removing these buildings from the rental base. This has decreased the vacancy rate for office space from 20 percent or more to approximately 10 percent, according to CoStar Group, the number one provider of information services to commercial real estate professionals in the U.S. and U.K. Industrial and “flex” space still shows slightly higher vacancy rates, but is definitely trending lower.
  • Limited land—The Valley floor is largely built out. Unlike in the wide-open Sacramento area or the Central Valley, Silicon Valley has natural geographic obstacles to growth—the foothills on either side of the Valley—placing a finite limit on where building can be done. Open space regulations have slowed growth on hillsides, and areas such as San Jose’s Coyote Valley are still being held for future development. With so little vacant land available, land prices can’t help but increase.
  • Rising construction costs—The cost of construction has also risen. It is simply more expensive today to build buildings than it was a decade ago. And the cost of new construction is considerably higher than renovating existing commercial/industrial space.

“The wild swings of the dot-com period are behind us,” Borelli remarked.  “The most educated guess is that rents will quickly return to “pre-bubble” rates, as property owners look to get their economics back into line.  Meanwhile, property values will resume their slow, but steady climb-making Silicon Valley commercial real estate a very good long-term investment.”

Important Implications for Business Owners

As business owners look to manage occupancy costs in the coming months and years, they have several viable options.

  • Purchase space-Smaller companies and professional firms now have the same option of owning their own space as larger corporations.  At business condominiums such as Borelli Investment Company’s Junction Office Center on Junction Avenue near Brokaw Road in San Jose, down payments start at $29,900 with 90 percent financing available from the SBA.  Sales prices for brand new office condos in the $10 million Junction renovation are actually below the replacement cost if that space had to be built from scratch.  Further, business owners can take advantage of significant tax write-offs, and also enjoy the potential appreciation predicted for Valley real estate.
  • Lease quality Class B space-Rents on much of the Class A space that has changed hands at large premiums over the past couple of years have already jumped.  Now is the time to look for quality Class B incubator office space (5,000 square feet or less) and sign longer-term agreements that lock-in lease rates.

“As more property changes hands at increased prices, rental rates and property values are going to continue to climb,” Borelli commented. “The risk of less predictable markets is largely behind us. The time for businesses to act is now.”