Friday, February 13, 2015

Should I accept an unsolicited offer for my commercial real estate?

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A proposal to purchase your commercial real estate arrives in your email inbox at work or your mailbox at home...after all your tax bills are sent to your home...and that is probably how the offeror got your address.

Your property is not for sale, nor are you marketing the property for sale...but you are curious about the prospects of selling. So what should you do now?

I will make the assumption that you are remotely interested in the terms of the proposal (not necessarily that you are willing to sell).

My advice to you is contained within the following bullet points.

Before we address the question of whether you should accept the proposal, we need to understand a series of related issues about the proposal and the consequences to you of a sale.

Determine if the proposal is real. Some unscrupulous commercial real estate brokers will use the guise of a proposal from a dummy entity to determine if a property might be available for sale. Once they know you are a seller, they will busy themselves and find a real buyer. Others will send letters to property owners declaring their knowledge of a buyer that wants to buy your property (all the while with no understanding of your property).

Gauge the terms of the proposal vs the market conditions. An owner that I represent received an unsolicited offer on a property that he owns. The buyer offered a price in excess of the market value BUT asked for a fifteen month escrow and an option period of twelve months within the fifteen months to study the real estate. We discovered that the prospective buyer wanted to re zone the property to residential and the price that he offered was contingent upon receiving the zoning change. In essence, the lure of a high price was dramatically offset by the maybe of the zone change.

Assess the motivation and capability of the buyer. Why does the buyer want to buy your property? How will the buyer finance the purchase? What is the source of the buyer's equity? What else has the buyer bought recently? Will the buyer occupy the building as an owner occupant with his business? The answers to all of these questions should be thoroughly vetted.

Quantify the financial impact of selling your property. The sale of commercial real estate is expensive. There are real estate commissions (3-6% of the sale proceeds), federal income taxes (15-20% if held as a long term capital gain and 25-40% if not), state income taxes (in California up to 11%), ACA fees of 2.8% if in excess of $250,000, potential prepayment penalties of any outstanding loans against the property, escrow and title fees, and potentially others. Your CPA should run an after sale analysis of the proceeds you will receive. Sometimes, the after tax hit is too great to justify selling.

Consider what you will do with the proceeds of sale. Some sellers of commercial real estate affect like kind exchanges through a 1031 tax deferred exchange. Others simply pay the taxes and invest the net proceeds or pay off other debts. Regardless, you should consult your tax and legal professionals on the impact of either direction.

OK, so now we have done an admirable job of qualifying the unsolicited offer...the deal is real from a motivated entity, at market (or above) price and terms and you have decided that the after tax whack is manageable, and that you will use the net proceeds to pay off your beach house. Should you accept the offer?

My counsel to you, in today's environment, is that you should not accept an unsolicited offer. The market is so VERY active currently that you might be selling your property for far less than an actively marketed property will fetch.

The BEST way to achieve the highest selling price in the shortest period of time is by creating demand and competition. This can only be accomplished by listing the property for sale with a competent commercial real estate professional, creating a package, running a process, and marketing the property to ALL of the potential buyers in the market. Insist upon a fee sharing, freely cooperative listing team with other commercial real estate brokers...but get the property out'll be amazed at the results!

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