One of the most frustrating things we encounter as commercial real estate professionals - and you as a buyer of commercial real estate - is a "no response." Zilch, nada, zero, crickets, anyone - Bueller?, all describe that sinking feeling you suffer when an offer is made and hours or days pass with no feedback.
Believe me, buyers, we feel your pain as a "no response" is much more difficult to explain than a quick "no thank you!"
A great deal of emotion is expended deciding to pursue a property. When met with nothing - the agony of defeat looms large.
So, why, you may ask, is my offer not receiving the red carpet welcome you believe it deserves? Indulge me as I proffer a few hypotheticals.
Your offer may not be very good. Many times, these days, asking prices make no sense are are not based on a real view of the market - I refer to these as arbitrary owners. Your well intentioned, researched and comp based offer may just not be enough to move the seller needle.
Competing offers may be in play. If a deal is priced right and there is no "hair", multiple offers prevail - and in some cases at above asking price. Occasionally, a seller will wait until he has several offers and then respond to one or all with a "best and final" request.
Seller decision making may be convoluted. Frequently, a commercial property is owned with an entity with multiple owners - thus decision makers. Allow a disagreement in direction to occur within the ownership ranks and - you guessed it - gridlock.
Something entirely un-related may have occurred. A death, extended vacation, business set back, a new lender requirement will cause a seller to re-think his strategy and delay a response.
Your offer may be too good. If a seller receives a full price offer immediately after listing - with limited contingencies, all cash, and a quick close - something curious occurs. Sellers may believe they've priced their offering too low and delay responding until a review of comps and availabilities can occur.
The seller may not have a destination for the money. As I have previously opined, sales of commercial real estate can create large tax liabilities. Tax burdens can be deferred with a 1031 exchange but if the seller is un-prepared for this shock - if I can't find anything to buy, I owe how much?- your offer may languish.
The seller may not have a place to move. Our market is encumbered with the lowest number of vacant buildings in history. Similar to not having a place to deploy the sale proceeds, if the owner occupant cannot find a place to move his business - a quick response is fantasy.
Showing posts with label buying commercial real estate. Show all posts
Showing posts with label buying commercial real estate. Show all posts
Friday, May 11, 2018
Friday, July 15, 2016
Should you Lower Your Asking Price?
Sellers of commercial real estate in Southern California have benefited greatly from an imbalance of supply and demand.
Too little supply coupled with a healthy demand. Only one way for sales prices and lease rates to go - straight up!
Fueled by declining available buildings and record low interest rates, sale pricing's steady upward march started in January of 2013 and, in my opinion, peaked in the first quarter of 2016. Lease pricing started the race to the top about a year later and probably has some track to run before reaching a checkered flag.
If you want to sell your building, you should consider a pricing strategy that reflects today's market. All those crazy numbers buyers paid a year ago, don't occur as much today - unless your offering checks all the boxes - and still probably not. Buyers are savvy. Their advisors are well informed. Everyone knows we are at the top and are proceeding gingerly - lest they make a costly misstep.
We recently sold a building in North Orange County. A competitor acquisition by the owner of the business and building created the desire to sell the building. Better suited for the combined operation was the competitor's location. The building we sold became the odd man out and therefore was slated for disposition.
Carefully analyzed were the market comparables, the currently available inventory, the building's amenities, and work that was necessary pre-sale. Our pricing recommendations were two fold - higher price with the seller paying for clean up and lower price without seller paying for the clean up. Opting to sell without spending the dollars to re-condition the real estate, was our client's decision.
We priced accordingly and sold the building in two weeks. Fortunately, our seller listened to us. Too often, a seller will take the high end of the range - in our case the recommended price if clean up dollars were spent by the seller - and not accomplish the refurbishment. All while rationalizing, "let's see what we get". A dangerous approach in today's market. Buyers will pay top dollar but the building better be perfect.
You may be wondering, hmmm, if we priced higher and deducted the clean up costs, wouldn't we have sold for more? Fair question. The answer was no, in this case. Had we priced at the top, conducted buyer tours, explained the property was being sold in its present condition, and fielded offers - the requested refurbishment discount would have far outstripped our "discounted" asking price. A buyer's perception of refurbishment costs always exceeds reality and they offer accordingly.
Ok, you might say, "I can always lower my price, I can't raise it." True to a point. What sellers frequently underestimate is the message pricing sends to the market. Priced too high - man, that building must have solid gold toilets. Or, that guy must be smoking the good stuff. Priced too low, a frenzy is created, multiple offers are generated, and asking price surpassed - in some cases.
Pricing an offering correctly - possibly a bit low - is so much easier than coming out with a super high un-achievable price and later reducing the asking price. When you commence the retreat in pricing, the market crosses its arms, waits, and says - "see, I told you that building was overpriced!"
Too little supply coupled with a healthy demand. Only one way for sales prices and lease rates to go - straight up!
Fueled by declining available buildings and record low interest rates, sale pricing's steady upward march started in January of 2013 and, in my opinion, peaked in the first quarter of 2016. Lease pricing started the race to the top about a year later and probably has some track to run before reaching a checkered flag.
If you want to sell your building, you should consider a pricing strategy that reflects today's market. All those crazy numbers buyers paid a year ago, don't occur as much today - unless your offering checks all the boxes - and still probably not. Buyers are savvy. Their advisors are well informed. Everyone knows we are at the top and are proceeding gingerly - lest they make a costly misstep.
We recently sold a building in North Orange County. A competitor acquisition by the owner of the business and building created the desire to sell the building. Better suited for the combined operation was the competitor's location. The building we sold became the odd man out and therefore was slated for disposition.
Carefully analyzed were the market comparables, the currently available inventory, the building's amenities, and work that was necessary pre-sale. Our pricing recommendations were two fold - higher price with the seller paying for clean up and lower price without seller paying for the clean up. Opting to sell without spending the dollars to re-condition the real estate, was our client's decision.
We priced accordingly and sold the building in two weeks. Fortunately, our seller listened to us. Too often, a seller will take the high end of the range - in our case the recommended price if clean up dollars were spent by the seller - and not accomplish the refurbishment. All while rationalizing, "let's see what we get". A dangerous approach in today's market. Buyers will pay top dollar but the building better be perfect.
You may be wondering, hmmm, if we priced higher and deducted the clean up costs, wouldn't we have sold for more? Fair question. The answer was no, in this case. Had we priced at the top, conducted buyer tours, explained the property was being sold in its present condition, and fielded offers - the requested refurbishment discount would have far outstripped our "discounted" asking price. A buyer's perception of refurbishment costs always exceeds reality and they offer accordingly.
Ok, you might say, "I can always lower my price, I can't raise it." True to a point. What sellers frequently underestimate is the message pricing sends to the market. Priced too high - man, that building must have solid gold toilets. Or, that guy must be smoking the good stuff. Priced too low, a frenzy is created, multiple offers are generated, and asking price surpassed - in some cases.
Pricing an offering correctly - possibly a bit low - is so much easier than coming out with a super high un-achievable price and later reducing the asking price. When you commence the retreat in pricing, the market crosses its arms, waits, and says - "see, I told you that building was overpriced!"
Friday, January 15, 2016
My Commercial Real Estate Didn't Appraise...Now What?
Appraisals of commercial real estate are required if you are financing your purchase through a lender - conventional or otherwise.
The possible exception might be an owner financed purchase. In that case, the owner becomes the bank and may not require an appraisal.
An appraisal is a lender's way of "hedging their bet" to insure the agreed upon value - the negotiated purchase price - is consistent with the market.
An appraiser is generally engaged by your lender and looks at three measures of value: market approach - recent sales of comparable buildings, the income approach - capitalized market rents, and cost replacement approach - the price of land plus depreciated construction costs . These three value measures are compiled, reviewed by the lender and a value is determined. The appraised value is then compared to the negotiated purchase price. If the appraisal supports the negotiated purchase price, great! If the appraisal is less than the negotiated purchase price, there is an issue.
So what can be done if the appraised value is less than the price that you and the seller have negotiated? In my experience, one of several solutions exist.
The seller can reduce the purchase price. The solution is simple but not easy to accomplish - especially in a robust market where buyers are plentiful. The seller chose you as the buyer because you had the best offer, the greatest motivation, or for another reason. Remind the seller of this fact. Also, if the building didn't appraise with your lender, there is a high likelihood that the building will not appraise with another lender. The low appraisal is now a material fact that will need to be disclosed to the next buyer - hmmm. Maybe a price reduction isn't so bad after all.
You can invest a larger down payment. If the seller is adamantly against reducing the purchase price, you can bridge the gap by making a larger down payment. Just understand your lender believes you are paying too much for the building so examine your reasons for buying the building.
A combination of the two solutions above can be used. Frequently, the seller and buyer will compromise and the seller will reduce the price slightly and the buyer will invest additional dollars to close the transaction. I would say this is the most common way in which a low appraisal is remedied - both parties participate to solve the issue.
An appeal can be made to the appraiser. Prior to the economic collapse of 2008, this was a viable option. We could "massage" the appraised value by talking to the appraiser, looking at the value measures and suggesting other comps, capitalization rates, or construction costs. These days, we have very little latitude because brokers are divorced from the appraisal review and the final determination of value. If all else fails, however, this is worth a shot.
The possible exception might be an owner financed purchase. In that case, the owner becomes the bank and may not require an appraisal.
An appraisal is a lender's way of "hedging their bet" to insure the agreed upon value - the negotiated purchase price - is consistent with the market.
An appraiser is generally engaged by your lender and looks at three measures of value: market approach - recent sales of comparable buildings, the income approach - capitalized market rents, and cost replacement approach - the price of land plus depreciated construction costs . These three value measures are compiled, reviewed by the lender and a value is determined. The appraised value is then compared to the negotiated purchase price. If the appraisal supports the negotiated purchase price, great! If the appraisal is less than the negotiated purchase price, there is an issue.
So what can be done if the appraised value is less than the price that you and the seller have negotiated? In my experience, one of several solutions exist.
The seller can reduce the purchase price. The solution is simple but not easy to accomplish - especially in a robust market where buyers are plentiful. The seller chose you as the buyer because you had the best offer, the greatest motivation, or for another reason. Remind the seller of this fact. Also, if the building didn't appraise with your lender, there is a high likelihood that the building will not appraise with another lender. The low appraisal is now a material fact that will need to be disclosed to the next buyer - hmmm. Maybe a price reduction isn't so bad after all.
You can invest a larger down payment. If the seller is adamantly against reducing the purchase price, you can bridge the gap by making a larger down payment. Just understand your lender believes you are paying too much for the building so examine your reasons for buying the building.
A combination of the two solutions above can be used. Frequently, the seller and buyer will compromise and the seller will reduce the price slightly and the buyer will invest additional dollars to close the transaction. I would say this is the most common way in which a low appraisal is remedied - both parties participate to solve the issue.
An appeal can be made to the appraiser. Prior to the economic collapse of 2008, this was a viable option. We could "massage" the appraised value by talking to the appraiser, looking at the value measures and suggesting other comps, capitalization rates, or construction costs. These days, we have very little latitude because brokers are divorced from the appraisal review and the final determination of value. If all else fails, however, this is worth a shot.
Friday, January 30, 2015
Ways to FINANCE a Commercial Real Estate Purchase
I have written extensively recently about the HUGE increase in selling prices for commercial real estate in Orange County, California. Since the beginning of 2013 we have seen sales prices increase by a whopping Fifty Percent! It dawned on me that my readers might want to learn about the various ways to finance commercial real estate...which is the subject of this post.
As a buyer of commercial real estate you fall into one of three categories...an owner/occupant (your company will operate out of the building that you purchase), an investor (you don't occupy the building but purchase the building for the tenant's rent), or an owner/investor (you buy the building and partially occupy the building and have the balance as rental income). I will focus today on the financing options of the owner/occupant and the owner/investor.
Small Business Association loans: Also known as SBA loans, real property (not equipment or cash flow loans) loans through the SBA are generally one of two flavors...a 504 or 7A loan. The 504 loan is a fifty percent first loan from a bank and a forty percent second loan from the government (also known as a debenture). The 7A loan is a ninety percent government guaranteed bank loan. Each type of SBA loan (504 and 7A) has its advantages and disadvantages. The advantages include, small down payments (10%), fixed interest rates, ability to finance building improvements, and wide availability from a number of lending sources. The disadvantages are the origination fees, the prepayment penalties, the collateral and personal guarantees, and the cash flow and years in business requirements. If you would like to read about SBA loans in greater detail, you can click here.
Conventional financing: Once upon a time, before the preponderance of SBA financing, if you wanted to buy a building, you showed up at your local bank or savings and loan office and applied. What resulted was a loan of seventy five to eighty percent of the purchase price. Boom. Done. Not much as changed over the years...except of course, the savings and loans are extinct, there are fewer commercial banks, and the banks would prefer for you to originate an SBA loan because the bank's risk is less since the government is guaranteeing a portion of the loan. Hmmm, I guess a lot has changed.
Seller financing: We saw a lot more seller financing when the market interest rates bubbled above four to five percent and a borrower could not seek ninety percent financing through the SBA. There are few advantages for a buyer to seek seller financing, but if a seller of commercial real estate owns the property free and clear and is willing to finance the purchase, the buyer generally avoids the need for an appraisal and may also skirt certain origination fees.
Third party financing: Does your Aunt Barbara or Uncle Frank have a substantial nest egg earning close to zero percent in a certificate of deposit? Maybe they would like to loan you the money to buy a building for your company. They get a great return on their money and have the security of the building as collateral. Plus, you'll have something to talk about at Thanksgiving!
Purchase the building for cash: I've only seen this occur a couple of times in a career that commenced when Reagan was President, but it happens. The cool structure is to buy the building personally (or as an LLC), with personal cash, and lease the building to your company. Your company then pays you rent...Bingo!
As a buyer of commercial real estate you fall into one of three categories...an owner/occupant (your company will operate out of the building that you purchase), an investor (you don't occupy the building but purchase the building for the tenant's rent), or an owner/investor (you buy the building and partially occupy the building and have the balance as rental income). I will focus today on the financing options of the owner/occupant and the owner/investor.
Small Business Association loans: Also known as SBA loans, real property (not equipment or cash flow loans) loans through the SBA are generally one of two flavors...a 504 or 7A loan. The 504 loan is a fifty percent first loan from a bank and a forty percent second loan from the government (also known as a debenture). The 7A loan is a ninety percent government guaranteed bank loan. Each type of SBA loan (504 and 7A) has its advantages and disadvantages. The advantages include, small down payments (10%), fixed interest rates, ability to finance building improvements, and wide availability from a number of lending sources. The disadvantages are the origination fees, the prepayment penalties, the collateral and personal guarantees, and the cash flow and years in business requirements. If you would like to read about SBA loans in greater detail, you can click here.
Conventional financing: Once upon a time, before the preponderance of SBA financing, if you wanted to buy a building, you showed up at your local bank or savings and loan office and applied. What resulted was a loan of seventy five to eighty percent of the purchase price. Boom. Done. Not much as changed over the years...except of course, the savings and loans are extinct, there are fewer commercial banks, and the banks would prefer for you to originate an SBA loan because the bank's risk is less since the government is guaranteeing a portion of the loan. Hmmm, I guess a lot has changed.
Seller financing: We saw a lot more seller financing when the market interest rates bubbled above four to five percent and a borrower could not seek ninety percent financing through the SBA. There are few advantages for a buyer to seek seller financing, but if a seller of commercial real estate owns the property free and clear and is willing to finance the purchase, the buyer generally avoids the need for an appraisal and may also skirt certain origination fees.
Third party financing: Does your Aunt Barbara or Uncle Frank have a substantial nest egg earning close to zero percent in a certificate of deposit? Maybe they would like to loan you the money to buy a building for your company. They get a great return on their money and have the security of the building as collateral. Plus, you'll have something to talk about at Thanksgiving!
Purchase the building for cash: I've only seen this occur a couple of times in a career that commenced when Reagan was President, but it happens. The cool structure is to buy the building personally (or as an LLC), with personal cash, and lease the building to your company. Your company then pays you rent...Bingo!
Friday, September 19, 2014
The MOST important thing in a #CRE purchase
We are immersed in a seller's market in Southern California...AKA, we are close to the end...because buyers are committing to CRAZY numbers for industrial buildings.
An imbalance between available inventory and buyer demand has sent the prices of well appointed (and even misfit toys) buildings past the pre-recession highs. Rents have not quite followed suit, but soon will, as buyers cannot find anything to buy...need to grow...and will lease instead of losing business.
So what do market conditions in my patch of the world have to do with the MOST important thing in a commercial real estate deal? Allow me to digress and meet you on the other side...
I provide Location Advice to owners and occupants of industrial buildings in Southern California...AKA, I sell and lease commercial real estate for a living and have since 1984. I have witnessed three price peaks in that period of time...and the resultant price busts...which qualifies me as an expert to discuss the market today...I believe.
So, back to the MOST important thing in a commercial real estate purchase:
Location: We have all heard that the three most important aspects of real estate are location, location, location. Although this has merit, I don't believe that location is the most important thing in a commercial real estate purchase. As an example, if the prime area for appreciation is an hour's drive from your home, what do you gain?...other than a commute in and out of the office of two hours per day. What if the location places your business farther from your customer base or your key employees, thus increasing the cost of your operation? As you can see, location is not the most important thing.
Function: Certainly if you are occupying the building that you buy, the function must conform to your use and the size must mirror your growth projections. The real estate must have ample power for your operation, generous loading and freeway proximity for your logistics, and sufficient sprinkler capacity and clear height for your warehousing. The office space within the building must be adequate to comfortably house your staff. The function must work...but at what expense?
Investment Metrics: If you are buying a piece of commercial real estate strictly for investment purposes, several factors should be considered...capitalization rate, current rental rate that the tenant pays, stability of the income stream, price of the building, general lease-ability, etc. In a moment you will discover the MOST important.
Financing: The interest rate and terms at which a commercial real estate purchase is made can cure a lot of ills, but is it the MOST important item in a purchase? Imagine if you achieved a 2% interest rate but the rate could increase at will. We saw an awful lot of prime rate adjustables in the early nineties that when adjusted crippled the borrowers. What if the loan comes with an enormous pre-payment penalty that will hamstring your ability to sell the building?
Pricing: Some would offer that if commercial real estate is purchased at the right basis (price), then any deficiency with the real estate can be overcome. Really? What if the reason for the pricing is functional obsolescence? A building fifty miles from civilization is going to trade for a much cheaper price than one in the heart of the central business district. There is generally a reason why something is cheap. The best alternative for your business may be a building right next door...but you will probably pay a premium.
Ok, so what is MOST important?
The answer is they ALL are the MOST important! In my experience the stars must align...AKA, all of the reasons must point to go in order for a purchase transaction to occur. Just like the pre-launch scene in the movie Apollo 13, you MUST be go for launch.
An imbalance between available inventory and buyer demand has sent the prices of well appointed (and even misfit toys) buildings past the pre-recession highs. Rents have not quite followed suit, but soon will, as buyers cannot find anything to buy...need to grow...and will lease instead of losing business.
So what do market conditions in my patch of the world have to do with the MOST important thing in a commercial real estate deal? Allow me to digress and meet you on the other side...
I provide Location Advice to owners and occupants of industrial buildings in Southern California...AKA, I sell and lease commercial real estate for a living and have since 1984. I have witnessed three price peaks in that period of time...and the resultant price busts...which qualifies me as an expert to discuss the market today...I believe.
So, back to the MOST important thing in a commercial real estate purchase:
Location: We have all heard that the three most important aspects of real estate are location, location, location. Although this has merit, I don't believe that location is the most important thing in a commercial real estate purchase. As an example, if the prime area for appreciation is an hour's drive from your home, what do you gain?...other than a commute in and out of the office of two hours per day. What if the location places your business farther from your customer base or your key employees, thus increasing the cost of your operation? As you can see, location is not the most important thing.
Function: Certainly if you are occupying the building that you buy, the function must conform to your use and the size must mirror your growth projections. The real estate must have ample power for your operation, generous loading and freeway proximity for your logistics, and sufficient sprinkler capacity and clear height for your warehousing. The office space within the building must be adequate to comfortably house your staff. The function must work...but at what expense?
Investment Metrics: If you are buying a piece of commercial real estate strictly for investment purposes, several factors should be considered...capitalization rate, current rental rate that the tenant pays, stability of the income stream, price of the building, general lease-ability, etc. In a moment you will discover the MOST important.
Financing: The interest rate and terms at which a commercial real estate purchase is made can cure a lot of ills, but is it the MOST important item in a purchase? Imagine if you achieved a 2% interest rate but the rate could increase at will. We saw an awful lot of prime rate adjustables in the early nineties that when adjusted crippled the borrowers. What if the loan comes with an enormous pre-payment penalty that will hamstring your ability to sell the building?
Pricing: Some would offer that if commercial real estate is purchased at the right basis (price), then any deficiency with the real estate can be overcome. Really? What if the reason for the pricing is functional obsolescence? A building fifty miles from civilization is going to trade for a much cheaper price than one in the heart of the central business district. There is generally a reason why something is cheap. The best alternative for your business may be a building right next door...but you will probably pay a premium.
Ok, so what is MOST important?
The answer is they ALL are the MOST important! In my experience the stars must align...AKA, all of the reasons must point to go in order for a purchase transaction to occur. Just like the pre-launch scene in the movie Apollo 13, you MUST be go for launch.
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