Friday, February 22, 2019

Who Will Pay the MOST for Your Commercial Real Estate

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Generally, as a seller of commercial real estate - you have three motivations - to transact as quickly as possible at the highest price with the fewest conditions. Simple. In practice, it’s a bit more complicated. Your offering - if properly marketed - will appeal to a number of different types of buyers. Below is a recap of each buyer type you may encounter and their pricing expectations.

Developer. Motivated by the highest and best use the property can generate - a developer views a parcel of commercial real estate in terms of a re-use, demolish and re-build, or new construction. Critical in a developer’s pricing is their calculation of the new construction’s ultimate value - rent or sales price. Considered are things such as construction costs, construction time, city approvals, market trends, and exit strategy. Generally developers are well heeled and can close once a city gives them the green light. Price they will pay - Low.

Investor. If the building you are selling has income - great! Where is that income relative to the market? How stable is the tenant? How much lease term remains? In simple terms - an investor will value the income stream based upon their risk tolerance. The higher the risk - the lower the number he is willing to pay. Occasionally, an investor will purchase a vacant building - one without a tenant. In this case - the cost to originate a lease is formulated. Taken into account are market rents, downtime, concessions, improvements, and broker fees. The dollar amount of lease origination is generally deducted from the purchase price - akin to a car dealer who will give you a wholesale price - retail less the cost of refurbishment. Price they will pay - Low to Low Medium.

Out of area occupant. Certain areas of SoCal are “catcher’s mitts”. Meaning - the natural migration of local buyers gravitates in their direction. Typically, this exodus occurs west to east - as our basin developed this direction. Orange County attracted buyers from Los Angeles and the Inland Empire attracted occupants from Orange County and the San Gabriel Valley. Geography like the port of Los Angeles or the greater Ontario area also can have national appeal. Folks looking east are pleased with the affordability and quality of construction. Companies forging a new Southern California location suffer from sticker shock. Price they will pay - Medium.

In area occupant. These businesses are established within the community where your building resides. Chances are their labor force is close by, they may own a home in close proximity, and they attend Rotary and the Chamber of Commerce meetings monthly. Plus, they don’t want to leave. Price they will pay - Medium High.

Neighboring occupant. Take all the components of an in area occupant and couple those with a facility next door - Voila. Add in some stickiness to their existing operation - extra power, excess parking, a use permit - Boom. Price they will pay - High.

Existing tenant. I’ve said many times - in this space - your best buyer is generally your existing tenant. Why? They understand your building better than you do. They’ve found great utility in the location and improvements. Their cost to move is huge. Trifecta! In some instances your transaction costs - no broker - are less by selling to your tenant - your bottom line is enhanced. They also pay rent to you while you are closing the deal. Price they will pay - High to Very High.

Black swan. Warning. These are rarer than a Ram’s Super Bowl victory - they happen - but not often. Defined as a buyer with a unique vision, need, or requirement that ONLY your property will fill - these “swans” swim in elevated waters. Some recent examples - a brewery operator who bought an industrial building across from a sport’s venue, an investor motivated by a tax deferred exchange, a church who’d sold their existing sanctuary and had a wad of cash to spend on a new location. Price they will pay - Off the Charts High.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at or 714.564.7104. His website is

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