Friday, March 6, 2015

How to Sell Leased Commercial Real Estate to an Owner Occupant

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Your commercial real estate is leased, you have decided that NOW is the time to sell the building and you have been advised that there is a "user premium" to selling the building to a company that will occupy vs selling the building to an investor that will collect the rents as a return on the price that she pays you for the building.

So just how do you navigate these waters and sell the building to an owner occupant...all while keeping your current tenant happy...and not spooking the current tenant into vacating the building prior to their lease expiration.

In no particular order, here is what I recommend that you consider:

Your existing tenant is your BEST buyer. I always recommend that you approach your tenant with your desire to sell. Because your existing tenant avoids the cost of a move, a costly fixturization of a new space, a disruption of his employees, and is comfortable with the layout, amenities and location of the building...he is the BEST buyer in many cases. However, your tenant may not want to buy the building. Publicly traded companies typically would prefer to lease commercial real estate to keep depreciation off balance sheet. Your tenant may not be financeable. Or, your tenant may foresee outgrowing the building before the next lease renewal, thus forcing a move. Regardless, thoroughly investigate your tenant's desire to own your building.

Lease term matters. Generally, if your tenant has eighteen months or more on an existing lease, too much time remains for the building to be attractive to an owner occupant. The primary reason is financing. Most owner occupants finance commercial real estate purchases with SBA loans. SBA covenants require that the owner occupant occupy at least fifty one percent of the building within one year. So with eighteen months remaining on a lease, there is adequate time to find a buyer and conduct a sale escrow with an eye toward an ownership transfer within a year or less of the lease expiration.

Consider the marketing process. In order to obtain the highest value for your commercial real estate, you will want to list the property with a commercial real estate broker and run a marketing process. A portion of the marketing process is signage in front of the building and tours through the building with potential buyers. How will your tenant react to these things? If the operation currently housed in the building is sensitive to outside visitors, this can be challenging.

Make sure your tenant understands what you are doing. If your tenant elects not to buy the building, you must be VERY specific with your tenant as to the potential outcome of your marketing process...you will sell the building to a company that will occupy the building when the tenant's lease expires...which means the tenant will have to move.

User premium, real or imagined. Historically, in Orange County, owner occupants (users) have been willing and able to pay more for a building than an investor who buys the building for the rental returns. With so much investor money in the market chasing returns, investors will accept a smaller return. Smaller returns coupled with rising lease rates have resulted in investor pricing quite comparable to owner occupant pricing. If your tenant is adamant about renewing OR if your tenant has at least three years remaining on his lease, you may be surprised at the price the real estate will fetch if you sell to an investor who will not occupy the building.