Friday, November 3, 2017

3 Commercial Real Estate Deal Gimmicks - Be Aware!

Image Attribution: www.pondstopocket.co.uk
Our commercial real estate market has progressed to the point of absurdity - in many instances.

Six full priced offers on a new listing whose ask eclipses the recent comps by 15%.

Or, sellers who are "dug-in" and not willing to listen to reason and therefore unwilling to budge on their expectations.

Finally, an occasional tear in the fabric which defies logic - a well located, improperly exposed building sells for 20% less than it is worth because the seller experienced a transition and couldn't wait upon a normal marketing process to unfold.

During these times we encounter some "gimmicks" which this column is meant to diffuse and provide warning to unwary buyers.

I'll just guarantee the rents. Occasionally we encounter a building with remnants of the last downturn - the occupants signed up during the downturn and consequently are paying a rent less than the current market will bear. As we discussed, the economic value of an income property is dependent upon the rent the occupants pay. More rent more value. Enter rent guarantees. The owner - hopeful to get maximum value -  will supplement the difference between market and the amount his tenants pay. Good in theory. Bad in practice. Any savvy investor will ask - what happens when the guarantee ends? Now I am stuck with an under market rent on a building for which I overpaid.

Below market asking price. This suggests one of two scenarios. Either the building has a latent issue - partnership squabble, non pre-payable loan, environmental contamination, long term lease at an under market rent, imminent city action for re-development, or the like. Or, the listing broker has priced the building this way in order to attract multiple offers, create a bidding war and generate activity above the market rate. If you are a buyer caught in this vortex, the pain never stops until someone says uncle!

A seller lease back. As we mentioned in previous columns, be wary of a seller leaseback - the rent he is willing to pay, his financial capabilities, and his motivation - especially if you are relying on his rent as a justification to buy at his value. Conversely, if the seller requires a lease back after you own the building to accommodate his move out schedule, make sure he has a place to go. In our market of skinny vacancy - a replacement may not be easy to locate.