The process of buying or selling commercial real estate can seem overwhelming. However, with the right processes and trusted advisers, these transactions can return positive gains for investors.
Reasons to Acquire a Commercial Property
Commercial real estate is purchased for a variety of reasons, including the ability to:
- Decrease capital costs
- Lower overhead costs
- Institute production improvements
- Accomodate company growth
- Maximize recruitment efforts by relocating to a desirable submarket
- Invest in an upwardly trending property to maximize return
Whatever your reason for acquiring commercial property, it’s a detailed process. Before any purchase, the buyer must align the purchase with their business initiatives, needs, and operation profile. Many times, commercial property is purchased with tenants – and leases – already in place.
Finding the Right Commercial Real Estate Representation
There are many players involved in the purchase and sale of commercial real estate. That is why it is paramount to secure the right representation. Commercial real estate agents and brokers are knowledgeable and can provide market-specific insight. In addition, a commercial property management firm can offer unbiased advice and act as the buyer’s or seller’s representation. In many cases a commercial real estate management firm offers corporate services, including acquisition / disposition due diligence, financial and accounting services, and lease administration.
Document Review
Once you have the right representation, it is time to turn your attention to analysis of the subject property – due diligence should include inspection and document review, among others.
Generally, when performing due diligence, document review should include information about:
- Zoning uses and restrictions
- Property history, including previous sale data
- Special land features including potential erosion, avulsion, falling debris, and possible hazardous substances
- All utility information, including water and sewage
- Any liens or unpaid property-related bills
- Certificates, notices, orders or requisitions that affect the land or buildings
Investor Structures
Purchasing commercial property comes with options in structuring ownership.
A sample list of ownership structures includes:
- Buying as an individual
- Buying through a partnership
- Buying through a company
- Buying through a trust
Before purchasing, every investor should obtain clarity on:
- Available loan amounts
- Loan-to-value percentages
- Terms (eg. 5, 10 and 15 years) and amortization length
- Variable vs. fixed rates
- Payment estimates that include principal and interest
Professional advisers can help you determine which option is best for you, the property and your individual circumstances.
Commercial Property Legal Representation
Of course before you make any offer, consult a legal professional. Your lawyer, along with the commercial real estate adviser managing the sale, will aid in reviewing the sale documents, terms and conditions, along with interpretation of any existing tenant leases, and instruct on any related tax issues.
Before making an offer, it is in your best interest to make it subject to certain conditions (laid out by both buyer and seller), such as favorable finance options, and approval of the terms and conditions of any tenant’s lease. Agree on a date – in writing – when you want your conditions met. Also, stipulate that no other party can purchase the property unless the conditions are failed to be met by an agreed upon date.
Steps to Sell Commercial Property
The first step in selling property of any type is determining its value. Included in this process is identifying comparables from the property’s submarket to aid in valuation and calculation of actual and potential income. Areas to address include finance options, maintenance records, environmental reports, and detailed data on the surrounding area. This adds up to a substantial amount of paperwork, some of which takes a considerable length of time to compile. Again, bemoaning the reason of why it is beneficial to contract with a professional.
Meissner Jacquét Commercial Real Estate Services, a San Diego-based firm, offers Acquisition / Disposition Due Diligence services to its clients. Jerry Jacquét , a Principal at Meissner Jacquét , has worked with numerous clients during their due diligence processes and says that, “not performing due diligence before any purchase or sale can wreak legal and financial havoc for an investor.”
Processes Validate Buyer Interest
Performing document review and initiating analytic processes aids in keeping the sale on track, and validates the buyers’ interest in the property.
So how can you get started? First, collect all necessary paperwork that validates ownership, property standing, and fulfills the buyer’s requests. These records will also substantiate your claims regarding the property.
According to Receivership News (a publication of the California Receivers’ Forum), the following documents should be included in that collection:
- Site plan
- Lot size and zoning information
- Architectural drawings
- Photographs (both aerial and ground level)
- Legal description
- Title commitment
- Narrative portions of an appraisal
- Capital expenditures (details of last 3 years, current and planned)
- Real property tax bills (last 2 years and current)
- Governmental inspection reports (description and status of any violations)
- Utility bills (one year)
- Licenses (description and name of licensed entity)
- Lease(s), sublease(s) and/ or operating agreement(s)
- Service agreement(s) (cancellation rights/penalties)
- Occupancy information (current YTD and last two full years, both detail and summary information)
- Competitive market analysis
- Furniture, Fixtures & Equipment inventory
- Environmental study – Phase 1
- Life and safety information/inspections
- Floodplain information
- Income Statements (current YTD and last two full years, both detail and summary information)
- Balance Sheet (current and last two YE, both detail and summary information)
- Ground Lease
Make it Shine
Putting your property’s best foot forward is an important step towards selling it. Make efforts to institute cost-effective repairs both to the physical structure and surrounding land. Easy fixes include, fresh paint, minor plumbing repairs, system checks, landscape refresh, pressure wash walkways, window cleaning, and parking lot re-stripe.
The Nuances of the Sell
Find and hire representation that specializes in commercial real estate, then compile a list of the property’s highlights. Catalog all of the aspects that make it unique, appealing and profitable. Be very descriptive. Be sure to investigate the current zoning allowances as these change from time to time. New allowances could make your property even more valuable. An experienced commercial real estate agent/broker will market your listing in all the usual places, but will also be creative and think outside the box to find all available selling opportunities.
Financing options need to be vetted carefully. What if you still have a mortgage on your property? Check your loan papers carefully for potential early payoff penalties and parameters around assumability of the loan. Both will impact what you need to ask – and get – for the property.
The Bottom Line
The bottom line is – do not leave any room for error, unanswerable questions, negative financial or legal surprises, or apathetic buyers.
Sources:
- California Receivers’ Forum
- US Bank National Association
- California Business Properties Association
- Meissner Jacquét Commercial Real Estate Services