WHAT YOU SHOULD KNOW WHEN SELLING COMMERCIAL REAL ESTATE

This is the first in a series of posts that will examine issues important to an owner of commercial real estate when contemplating selling that commercial real estate asset or portfolio. This information is geared for individuals, families, partnerships, limited liability companies and corporations that own a small to medium sized commercial real estate property or portfolio that they may want to sell. Hereinafter, I will refer to these types of owners and landlords as “Owners”. These Owners usually do not own commercial real estate as their primary business.

Please note this is not intended for large institutional owners—equity funds, real estate investment trusts, life insurance companies, and the like. These types of commercial real estate owners have batteries of experts to assist in the analysis and disposition of large individual assets or portfolios that may be located all over the U.S. or the world.

The first issue is to ask what exactly are you selling?

This question is meant in an even broader sense than to ask is it retail, office, land, warehouse, residential, or industrial property? No matter which type of property, there are two major markets available for the property with limited overlap between the two markets. They are:

  1.  the “user” property market, and
  2. the “investment property” market.

What is the difference between user and investment commercial real estate?

The answer is pretty simple. User property is commercial real estate that is used by the Owner to operate its business. Examples include a professional firm (law firm, CPA, medical) that owns the office building that houses its firm or practice, a retailer that owns not just the business but the real estate where the store sells, a warehouse that is owned by the manufacturer, or a restaurant that also owns the restaurant building. User properties are usually delivered vacant at closing with a new Owner looking to move in to operate its own business. So, if the property will be delivered vacant at closing, unless your property represents a development or redevelopment opportunity, users are your best market. The good news is that users typically will pay more for a given building than an investor. The intrinsic value of operating its business in the building may justify a higher price to a user.

Investment commercial real estate is usually delivered subject to a lease(s). While it is true both users and investors value future appreciation, an investor is primarily concerned with the income and return on investment that the building will generate over the period of time the investor holds the building. Investor buyers prefer to minimize or eliminate “lease up” risk by purchasing buildings that are already fully leased, or nearly so, with good credit tenants. If the investor buyer needs to lease up the building or the tenants represent poor credit risks, it will lower the price the investor is willing to pay.

Why it is important—timing and pricing. Factors associated with the Owner/user’s business are more likely to spark the decision to sell the building. These may include growth, contraction, retirement of key Ownership personnel, turmoil in the Ownership entity, and the like. The market for the particular commercial property may be good or bad when the business event occurs that will drive the sale. To the extent possible, Owner/users need to forecast these events to allow for a reasonable period of time to capture the best price available in the then current market. They also need to price the asset correctly. As user property, the asset may command a higher price for the reasons above, but prices and price per square foot attained by comparable properties (“comps”) are the key components in determining the best price.

Investor properties are driven much more by interest rates and the leases on the property. An investor Owner may choose to sell in anticipation of key tenant leases expiring, tenants defaulting, or simply to cash in to take advantage of an opportunity available in the market. Prospective investor purchasers will be most interested in the length of the tenant leases and the strength or credit risk posed by the tenants. In addition, if interest rates are low, the investor purchaser may be able to leverage the rate on its loan compared to the return on the building to increase its overall return on investment—example—borrow at five percent but make a return of more than five per cent. Investment properties may frequently command a price per square foot that would make no sense to a user buyer. Comparable returns on similar properties and for alternative investments, along with the risks associated with the leases, will be the most important factors in determining the best price.

Recognizing where your asset is positioned and forecasting to the best of your ability will maximize the chances for a successful transaction.

Rick Lane is a two-time Weichert Realtors Commercial Real Estate Agent of the year in the Washington, DC Metropolitan market. He has 20 years’ experience in real estate brokerage and real estate law and construction. He is a winner of a Weichert National Sales Award (top 5% nationwide). He is a former partner in the law firm of Thompson and Waldron and a former Vice President with the Trammell Crow Company in Washington, DC. Rick is a graduate of the University of Virginia and William and Mary Law School.






This is the first in a series of posts that
will examine issues important to an owner of commercial real
estate when contemplating selling that commercial real estate
asset or portfolio. This information is geared for individuals,
families, partnerships, limited liability companies and
corporations that own a small to medium sized commercial real
estate property or portfolio that they may want to sell.
Hereinafter, I will refer to these types of owners and landlords
as “Owners”. These Owners usually do not own commercial real
estate as their primary business.