Friday, June 10, 2016

Are You PREPARED to Make a Commercial Real Estate Deal?


Image Attribution: www.grahamak.com
You've decided that now is the time to sell your commercial real estate. Many factors have brought you to this place. We won't discuss those reasons today. Or, selling is not your thing and you believe it's best to find a tenant for your vacant building and commit to a long term lease. On the flip side, you are an occupant whose business need has propelled you into the market to find a suitable location to house your business. You may choose to buy or lease a location. 

Regardless which side of the transaction your interest lies - owner or occupant - are you prepared to make a deal? Let's quarter this question and analyze all four positions - owner selling, owner leasing, occupant buying, occupant leasing. 

Owner selling. A funny thing happens when you market your commercial real estate for sale - folks want to tour, questions arise, issues surface - you get offers! Now what? Well, you respond to the buyers and negotiate the transaction, right? Sometimes, not that easy. Occasionally, owners are un-prepared for the inevitable - actually making a deal. Make sure you've engaged good tax, legal, and commercial real estate brokerage assistance - before you take your property to market. Know the tax impact to you of the sale and create a strategy for the proceeds. - will you pay the tax or exchange the gain into another building? What contract form will you use to execute the sale? There are some good standard documents such as the AIR Purchase and Sale Agreement, but will this contract provide adequate protection for you as the seller and enough representations and warranties for the buyer? Your commercial real estate broker should provide a complete review of the market, financing scenarios for potential buyers, and a means to vet prospective purchasers and their ability to close. Often the best buyer is not the buyer who offers the most. Finally, you should consider completing some pre sale inspections of the roof and air conditioning and adjust your asking price accordingly. You're ready. Bring on those buyers! 

Owner leasing.  Equally important in leasing your commercial real estate, is assembling your tax, legal, and brokerage team. The primary differences in a sale and lease are the tax impact to you and the nature of the relationship with the occupant - you are not generating a pile of cash that is subject to taxes and you are creating a three to five year "marriage" with the occupant. Things such as the occupant's use of the building, the occupant's credit worthiness, your means and desire to fund tenant improvement costs and brokerage fees must be carefully planned. Remember, you're not closing a sale and receiving any cash. How will you fund the costs of the transaction? You're making a credit call. What will you require from the prospective occupant to insure you receive all your rent in a timely manner?

Occupant buying. Before you jump in the car to look at the new building that popped up down the street, get yourself pre qualified for financing. Period! Will your use of a building require any special permits? If so, have knowledge of the time necessary to perfect these permits. Have a handle on your cost to move. I've seen this derail many deals when occupants underestimate this cost. Finally, create your buying entity - LLC, etc. and sit with your tax professional to understand the tax impact of owning vs. leasing commercial real estate. Ok, let's see what's down the street. 

Occupant leasing. Similar to buying in your preparation, but different in the financing. You are not seeking bank financing for a purchase. You are, however, persuading an owner to "loan" you the use of his building for three to five years in return for paying him rent. Make sure your tax returns (personal and corporate) as well as financials (personal and corporate) are complete, up to date, readily accessible and easy to forward. All owners will require a review of your credit worthiness. Submit your financials with your offer to lease. You'll save tons of time and get a speedier response.