Owning commercial real estate for your business is a great investment, builds equity, provides stability, and gives you complete control over your facility. But what about the future?
Pride of ownership, lower cost of owning as opposed to leasing, and market value appreciation are all benefits as an owner user. However, understanding the next steps is important in maximizing the value of your real estate as well as your business.
Considering the Future: What is the Best Plan?
Everyone needs to keep an eye on the future despite the needs of the present. This applies to real estate much in the same way it does your business.
We advise owner users to consider the following:
What is your goal for both your business and your real estate? Do you plan on passing both on to your children/business partners? If so, has that plan been established yet with those parties, and do they understand the value, costs, and responsibilities of operating real estate?
What improvements have you made to the property over the time you have owned it? In real estate, we call these “Capital Improvements”. They are material improvements made to the property over the time you’ve owned it. The costs can be depreciated over time, and the value of the work should be considered if/when the building trades hands.
Is it the goal to sell the business in the future? If so, the best strategy is to have the real estate set up under a separate entity. You can make the decision to sell the real estate with the business to the same buyer, but a better outcome can come by one of two ways: Cash flow from holding the real estate with a lease to the new business buyer OR a market sale process that is run to achieve a market value to a separate buyer either with vacancy or from a lease with income to determine value.
Why it matters: Owner users can lose value on their real estate by not planning ahead. We advise owner users that consider a sale to understand what values look like in the market from both a leasing and sale perspective. Both have different tax, cash flow, and sale value advantages.
Understand the Due Diligence Process by Doing Your Own
If you’ve made the decision to sell, you’re best suited to look into the areas a prospective buyer will scrutinize before you go to market.
Documentation of all capital expenditures. Buyers will want to see records of renovations, system upgrades, and major repairs.
Have up-to-date rent rolls and lease agreements. If you lease part of your property, ensure all leases are documented and up to date.
Have a ledger of any current service contracts for the property. Insurance, utilities, telecom, landscaping, and HVAC maintenance are all examples of service contracts.
The Deed, ALTA survey, Title Insurance Policy, and any Environmental Studies. A best-positioned seller will have these all in hand once it is time to sell. Properties with these materials performed recently have the best chance of achieving their target price over those without. An ALTA survey can cost about $6,500-$8,000.
Why it matters: A buyer needs to see these materials; if they have to pay for them, they will factor that into their offer price. It also gives a seller an understanding of what to expect during the marketing period leading to an accepted offer and the due diligence period leading to a closing.
Understand Highest and Best Use and Market Value Highest and Best Use. Understanding the highest and best use helps determine value. No further action is needed if the property is currently used to the most value it can achieve in the current market. If there is a higher and better use, a feasibility study by an engineer for that use is suggested to understand market value. A feasibility study can range between $2,000-$8,000, depending on the property size.
Get an environmental report if you do not already have a recent one. A Phase I Environmental Site Assessment will be a standard due diligence requirement for any Buyer. Addressing issues early can prevent a sale from falling apart if issues arise. This typically costs about $3,000.
Work With a Real Estate Professional Who Knows Your Property and Your Market
Selling a commercial property is unique and can have its own set of expectations and standards. It’s a complex process that requires industry expertise. A qualified broker will have experience in your property type and can describe the process, so you know what to expect. Here is what we do to facilitate the process:
Set up a meeting to understand the Property and Your Goals. What are you looking to achieve from a sale? Let’s sit down and understand that first. We can also understand how well-positioned you are as a seller today and offer advice on what steps to take to improve that.
Get a professional valuation. A competitive market analysis from a qualified commercial real estate professional will account for recent sales comps, lease comps, market availability/scarcity of type, and condition/value of the physical asset.
Set Up a Marketing Strategy. Once goals are understood and value has been determined, it’s time to set up a strategy to achieve them.
Leverage Our Network. We speak with buyers of office and industrial real estate every day and have a database of active users, developers, and investors.
Final Thoughts
Owning the real estate your company operates out of adds an additional tranche of value that can be leveraged in different avenues of future cash flow, estate planning, and retirement. Whether among partners or as a sole business owner, the additional value of real estate can increase the individual’s net worth when it’s time to stop working.
Physical maintenance, accounting and operational maintenance, and market analysis are all very important to maximize the value of your asset. We work with both institutions and privately held owners of office and industrial real estate to best position themselves to meet their goals over decades.