6 tough conversations you will need to have
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 to factor in, including the professionals who represent each side, such as brokers, lawyers, lenders, CPAs and the like.
All must genuflect at the altar of the deal for it to close. Generally, the level of cooperation is enhanced when the advisers do their jobs. That is, conduct the tough conversations that 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 all 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 building’s use 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 all will 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 about 40 percent 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 that should be fully vetted.
Small-business owners who 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 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 presale inspection to identify any issues and an assigning a cost estimate.
Even if you opt to wait on the fixes, you know what they will run.
The weird thing is demand still exceeds supply. There are fewer buildings on the market than buyers. What has changed since last year? Buyers are proceeding more cautiously, offers well below asking prices are the norm and market times have increased.
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 is a principal with Lee & Associates Commercial Real Estate Services in Orange. Reach him at abuchanan@leeassociates. com or 714-564- 7104.
Brokers, sellers and buyers need to cooperate and talk well ahead of signing day to make sure a commercial real estate sale doesn’t get bogged down by the smallest details.