Pricing Property to Sell

As the economy improves incrementally, commercial real estate is regaining attention as a stable, reliable investment [vs equities or bonds]. Its published knowledge that American businesses (including private equity) kept over $1 trillion in cash profit from sales since the depths of the [Great] Recession; currently cash is king. Banks are lending cautiously, yet in measured amounts. Investors are searching for choices that offer a mix of stable cash flows and future upside. Complete rehabs of functionally obsolescent buildings are an alternative investment, if handled shrewdly.

Plan and Prepare Basics

If you’re considering to sell a property you own, strategy and planning are key to a successful sale and use of proceeds. Stick to your plan; leave a bit of room for flexibility. Recruit multiple offers to assure the sharpest sale terms; have alternate buyers ready to fill sales that break up unexpectedly.

Seasoned, experienced, savvy service providers to process the transaction include a real estate analyst, Public Engineer, CPA and attorney.

a.  Real Estate Analyst. This knowledge worker, whether support staff or private contractor, will project an opinion of value of the property from accurate income and expense figures. (This is my service niche.)

b.  Pre-Inspection. Its to your benefit to hire an engineer (P.E) or commercial inspector to report on the physical condition of the property before bringing it to market. Leaving the inspection report up to the buyer could put you in a materially weak negotiating position, creating a lower perception of value by the buyer.

c.  MAI Appraisal. Order a professional appraisal of the property before sale, approved by an MAI; scrub the results against the opinion of value from your analyst. No buyer can argue with the results of an appraisal from a licensed appraiser and MAI.

d.  Legal. Assure the contract of sale fairly protects you and the buyer; read a sample copy from your attorney before they customize it to your transaction.

Four Essential Questions

Prior to bringing your property to market, ask yourself:

  1. What’s it worth?
  2. Where to place the sale proceeds?
  3. If you make a like-kind, tax-free exchange, identify the replacement property (ies) before bringing your property to market.
  4. Paying capital gains taxes on the sale proceeds? Talk with your CFO or CPA about profits’ affect on your P&L before bringing the property to market.

These preparatory steps include expenses and time worth investing in to avoid losing a sale, or negotiating unexpected material hurdles of sale that could lower the closing price you envisioned. These steps map a path to a smooth close, with flexibility as needed.

1.  What’s it Worth?

These facets of value, some of which are severable from the whole, work in-unison to generate an accurate value for the property:

  • Integrity of income (eg. rent from tenants, billboards and antennas, parking income)
  • Projected rents from lease renewals and potential vacancies
  • Does rent from long term leases (10yrs or more) sustain, lock or step-up revenue?
  • Does the building operate efficiently?
  • Is maintenance effective and costs sharp?
  • Is the assessed value of the property reasonable?

Additionals:

  • Are there hazmats behind walls needing abatement at relet?
  • Do floor plate sizes help/inhibit lease up?
  • Could select floors be re-positioned for better uses at higher rents or sold as condo?

The tangible and intangible variables of a property directly affects the capitalization rate applied to NOI to produce an accurate property value. Some are:

  • Building features (common area cosmetics, telco wiring, green skin and mechanicals)
  • Property’s ability to compete in the community for tenants.
  • Does the legal ease of your lease help, hurt or inhibit property value?
  • Credit of larger tenants

Uses for Sale Proceeds

Sale proceeds are substantial, you’ve agreed with your senior staff about where to place them (i.e. re-invest, pay debts, fund new development, etc). If you’re a single user of owned property, is this sale a leaseback to free-up cash? Proceeds may be divided among facility expenses, short term rent and to fund growth.

Like-kind Exchange. If you’re planning a like-kind, tax free exchange of properties, identify a list of replacement properties that meet your investment goals and core portfolio. Hire an experienced, neutral agent to handle the exchange of properties.

Capital Gains Taxes. If capital gains taxes are to be paid from sale proceeds, have a detailed discussion with your CFO or CPA about how the net profit will affect your P&L.

My Services

If your real estate investment business needs a savvy analyst for a sale project, who can also present the results with charisma, please contact me to discuss your specific needs.  If my skills fit the needs of your sale project, my hiring terms are:

About Mayer Segal
Click "About Us" link above.

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