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Assuming a buyer will simply discount the purchase price to
address deferred maintenance. Let’s imagine your roof needs
replacing, HVAC units originated during the Clinton administration - but don’t
blow as hard, the exterior needs a swift coat of paint, and the landscape is as
overgrown as California’s budget. As a seller - you might opt to forego
spending dollars to remedy the issues. There are three flaws to that approach.
First, the prospective buyer will ALWAYS estimate the repairs higher than
reality - which creates a wrestling match between buyer and seller as to who
pays and how much. Second, the buyer may not have the cash necessary to perform
the fixes. Remember - most buyers finance purchases. If the price is reduced
and the buyer uses his cash as a down payment - where is the repair money?
Third, the buyer has a business to run and may not be willing to adopt a
“project” of repairing a broken building.
Marketing a building while occupied. At first
glance - this may appear to be an owner benefit. After all - the occupant is
paying rent while folks are traipsing through. The reality? Tours are tough as
arrangements must be made around the tenant’s schedule - which might not jive
with the prospect’s. It’s difficult to see the potential - as the space is
filled with employees, equipment, inventory and all manner of activity. Another
pitfall? If your relationship with the resident has been less than stellar or
if the building has some notable shortcomings - don’t expect a glowing review.
You may miss the buyer with an immediate need as the space cannot be occupied
at the close of escrow.
Not placing the space in “lease-ready” condition. There is a
commonly held belief in the commercial real estate profession. What is it you
may ask? If your goal is to lease your commercial real estate - the premises
must be converted into a “lease-ready” condition. What is lease ready? Offices
re-painted and carpeted or left for the tenant to choose the flooring - with a
board of flooring choices. Warehouse area painted and cleared of all machinery,
equipment, and debris. Restrooms, break room, and common areas deep-cleaned. A
prospective tenant must be able to walk-in and immediately imagine his company
occupying the space - and not be distracted by the old mini-blinds left over
from the previous tenancy.
Harboring a hidden agenda. Does the occupant of the
building have any Rights of First Offer, Rights of First Refusal, Options to
Buy, Options to Expand or Contract? Has the current tenant found a place to
move? Is the marketing effort simply a nudge to persuade said tenant to renew
his lease? Only careful questioning will uncover the secret. We recently
proposed on an offering only to discover the tenant had a right to buy the
building. Fortunately, the right was relinquished and our folks got the deal.
But, days were wasted while the right was vetted.
Allowing a buyer to know more than the seller knows. A buyer will
have a period of time to conduct his due diligence - a fancy way of saying he
can walk away if he can’t get financing or dislikes the color of the exterior.
Appraisal, Enviro reports, title review, building inspection - including roof,
air conditioners, plumbing, electrical - and city conversations about zoning,
improvements and proposed use will conclude during the buyer’s contingency
period. What will they find? As a seller, you’re not required to know. However,
if you are aware of issues and don’t disclose them - you might get a nasty gram
from the buyer’s attorney. I counsel sellers to do a bit of pre-work on the
building’s condition. This might entail hiring an inspector and budgetary
bidding for problems uncovered. Surprises are avoided and sale proceeds are
maximized.
Allen
C. Buchanan, SIOR is a principal with Lee & Associates Commercial Real
Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com
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