What You Should Know when Selling Commercial Real Estate

November 28, 2016 by

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.

A Borrower’s Guide to Managing the Lending Process

October 25, 2016 by

Most commercial real estate borrowers will deal with a commercial bank on transactions up to $10,000,000, although some small life companies may welcome deals close to $10,000,000. In addition, Commercial Mortgage Backed Securities lenders will sometimes make loans under $10,000,000 for quality income properties. Getting a bank loan is a process that takes time—sixty to ninety days is typical.

A CRE purchase contract often will involve a contract contingency for financing. The financing contingency must be satisfied within the contractual time period or the borrower could forfeit the contract’s earnest money deposit. So the clock is ticking for borrower, the lender selected, the real estate agent, title company, and any attorney involved in the transaction. Once the purchase contract is executed and loan application made, the deal is still a long way from being done. A hands-on approach for the borrower is imperative to get to closing. As a former lender, I am familiar with the many hiccups and derailments that can occur during the loan application and approval process.

Thirty years ago, loan officers had substantial lending authority. When I left banking my authority was $5,000,000. Today, most loan officers have been schooled and equipped with only the most rudimentary tools, and are not qualified to assess risk. The actual loan authority now usually rests with a “ loan committee” which includes an analyst and other bank lending officials. Remarkably, the frontline person the borrower is dealing with is marginalized. Moreover, the borrower may not have a qualified person advocating for the loan.

When I refer to managing the lending process I am suggesting that the borrower and the borrower’s real estate agent, closely monitor and oversee the requirements of the lender, compliance with the purchase and sale contract (PSA), and the time limits for each step along the way. As a caveat, if this is not done, surprises are common that can either delaying or jeopardize the entire deal.

The following bullet-points (no order) will go a long way towards nurturing your deal to the finish line:

  • KNOW YOUR OWN FINANCIAL CAPABILITY! Check your credit before loan application, prepare a personal financial statement, and assemble the last three years of tax returns. You will be doing everyone a favor and troubleshooting the process. The lender will require this information in any event.
  • If the purchase is an investment, I strongly recommend preparation of a preliminary cash flow analysis. Generally, lenders will require a benchmark 1.2 to 1.5 loan to debt service coverage to make the grade. The National Association of Realtors, via their RPR (www.narrpr.com) subsidiary offers easy to use software that can turn around an analysis in 20 minutes. Again, this is a preliminary run. The bank analyst will do a more sophisticated ARGUS analysis as well.
  • Assist, Prior to loan application, shop the lenders for expressions of lender interest, interest rates, and terms. Lenders are competitive but some will show more appetite than others.
  • Establish and fully understand the approval procedure of the lender (individual or committee).
  • Understand whether the loan is non-recourse, recourse, and the extent of any guarantees.
  • While I do not recommend applying to multiple lenders, identify a backup lender.
  • Be proactive and troubleshoot the process.
  • Assist with due diligence and track contract and loan application compliance.
  • Assess any environmental or appraisal issues at the onset.
  • Be certain as to the timeline for receiving a final approval letter from the lender, and note any contingencies in that letter.
  • Anticipate and complete any purchase contract and financing contingencies.
  • If the deal is a 1031 tax deferred exchange for either party, compliance with the IRS Code time limits is crucial.
  • Make sure the designated settlement firm gets a preliminary title report to unearth any issues early on in the loan process.

The foregoing are just a few suggestions to put on your “checklist”.

Next: Please look for discussions involving life companies, CMBS (Commercial Mortgage Backed Securities), and alternative financing, “How do I Select a Commercial Real Estate Agent?”, “Managing the IRS Section 1031 process, “and “How to Look for Office Space?”?

Most CRE borrowers will deal with a commercial bank on transactions up to $10 million, although some small life companies may welcome deals around $10 million, and CMBS lenders on smaller net-leased transactions. Getting a bank loan, of course, is a process.

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