Six Tough Commercial Real Estate Conversations - Cooperation Can Help!

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Cooperation is a reality in commercial real estate deals. Meaning - a buyer and seller or landlord and tenant - must reach an agreement. Simple. But there are other layers of cooperation which factor in - the professionals representing each side - brokers, lawyers, lenders, CPAs, and the like. All must genuflect at the alter of a deal for it to close. Generally, the level of cooperation is enhanced when the advisors do their jobs. That is - conduct the tough conversations which should precede any transaction. Indulge me while I describe a few of my favorites.

The disruption of a move. Sure. Moving to save a few dollars may seem like a good idea. But, a move is expensive! Once physical moving expenses, the potential loss of key employees, downtime, fixturization of the new facility, and customer confusion are weighed - are you really saving? Have you considered things such as internet speed, a new phone number, website changes to reflect the new address, revised marketing collateral? Add any sort of complexity to the use with which you utilize the building and a costly use permit may be needed. Someone must consider the true cost of a move before you wander into the market.

Taxes, taxes, taxes. Uncle Sam, the state of California, and the Affordable Care Act will all want a major taste of your sale proceeds. The time to understand the impact is before you plant that “for sale” sign. Easy math. You can plan on approximately 40% of your gain to be consumed by taxes. Whaaaat? That’s correct. A tax professional can run the numbers for your specific situation. Sure. You can employ certain tax deferral strategies - a 1031 tax deferred exchange, a charitable remainder trust, or an installment sale - but all come with complexities which should be fully vetted.

Market realities. Small business owners that buy or lease commercial real estate are smart. They read. They listen to their customers. They’re informed. In today’s market - unrealistic owners get crushed. The halcyon days of crazy asking prices, waves of buyer interest, and feeding frenzies have vanished like La Niña. Sure. Deals are transacting - but, at a more normal pace.

Condition of the building. During the go-go days of 2016 and 2017 - a buyer would overlook repair necessities such as the roof, air conditioning, paving or exterior condition. Not anymore. We recommend a pre-sale inspection to identity any issues and an assigning a cost estimate. Even if you opt to wait on the fixes - you know what they will run.

Limited availabilities. The weird thing is demand still exceeds supply - there are fewer buildings on the market than buyers. What’s changed since last year? Buyers are proceeding more cautiously, offers well below asking prices are the norm, and market times have increased.

Complete information. Access to scaled drawings, an office layout, a building inspection highlighting the condition and needed repairs, a current title report, copies of leases, expenses, maintenance contracts, and utility bills - all can hasten the timing of a transaction. Buyers will ask. Have them ready.

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