Portfolio Management: Position Commercial Property for Sale

A natural goal of property sale is to leverage market conditions to optimize value from equity, operating cash flows and/or capital appreciation.  A high-level business analysis of objectives can position the price to attract your target buyers.  Stabilized long-term future cash flows are likely to attract low-cap core buyers.  Expiring leases totaling 25-40% of GRA are likely to attract value-add buyers.  Vacancy of 41% or more or sale of surplus land is likely to attract opportunistic buyers (e.g. property reposition or land development).  Feasibility analysis should factor stakeholder interests of property ownership (e.g. equity invested), portfolio management (e.g. return on investment), and asset management (e.g. value of cash flows).  Analysis should produce 3-4 sale paths that meet yield objectives of equity invested.  The holding period should be limited to the asset’s ability to generate preferred yields.

Sale to a core buyer can occur from stabilized cash flows of moderate to high credit tenants lasting 7-10 years forward.  A peak selling price is likely; future returns are likened to a low-risk bond.

Sale to a value-add buyer can occur from 60-75% stabilized cash flows lasting 5-7 years forward.  The sale price will be a risk premium [over the core cap rate] that factors re-lets to occur within 5 years, costs of deferred maintenance, and economic conditions of the submarket.  A value-add sale could tap capital appreciation to place into an attractive investment opportunity.

Sale to an opportunistic buyer can occur from 59% or more upcoming vacancy, extensive capital improvements to bring the property to modern standards, or to sell banked land for development.  The sale price will be a risk premium [over the value-add cap rate] to factor hard and soft development costs.

The success of each sale choice is dependent on a feasibility study aligned to stakeholder objectives.  Fine points of the listing will shape marketing and closing terms of sale.  BREG can prepare a detailed feasibility study to present to stakeholders; it can also provide asset management services to prepare the asset for sale.  This post outlines that service.

About Mayer Segal
Click "About Us" link above.

Comments are closed.

%d bloggers like this: