Easy and hard transactions

You have to constantly counsel clients about the vagaries of the market

Like the weather, the commercial real estate market cycles up and down, over and over. We have been busy selling properties, albeit some transactions are easier/smoother than others.

The sale of a property starts with the decision to sell, and in the commercial arena, it sometimes involves a leaseback. Our client is buying an office building he built for a firm 10 years ago. Today, some of the firm’s principals are retiring, and others do not want to be in the “real estate business.” So they have extended their lease seven years and are selling the building based on their promise to pay rent for at least the next seven years, and most likely far beyond.

On the other side of the spectrum is a property leased by “the phone company” for over 20 years. But a large fleet, construction and engineering operations center, designed before the deregulation of the industry, is not a good fit today, when technological leaps have more than halved the workforce.

This industry still has a lot more wringing out to do. (I keep reminding myself to cancel my “landline” as it is $40+/month just flying out the window! Even in a “bundled” program, it is as much as my cellphone, over which I get and make 95 percent of my calls.)

In this instance, a vacant, 60,000-square-foot operations center needs a new owner. This is not an easy task for the broker, given that the property has way too much office space for the existing warehouse/high-bay space (about 30,000 square feet each). Today, the market ratio is more like four or five times as much warehouse/high-bay space for every square-foot of office space.

Did I mention this was a drive-in, drive-out building with no loading docks? Well, that is a considerable challenge in the 21st century, when firms want big tractor trailers offloading on one side and lots of trucks and vans loading (and delivering) from the other side.

Fortunately, this specific property has a large, paved, fenced-in yard, well-lit and secure for outside storage, also called a “laydown” area.

So we have a buyer who has guided it toward U.S. Small Business Administration financing, and the buyer is selling two smaller properties – and looking to do an IRS Section 1031 Tax-Deferred Exchange This is what keeps us brokers and consultants up at night.

We just took on a listing for an office building formerly owned and occupied by a law firm. Alas, the partners went in different directions and the building is vacant.

We did a detailed analysis and confirmed that for the principal owners it will make more sense to sell the building than try to rent it, which might involve two or more tenants, considerable fit-up and meager real estate commissions, as well as other upfront expenses for three, four or five years of rental income.

This is not for the faint of heart, especially when a single-user building is being repurposed as a leased property to one, two, three or four tenants. That is not to say it cannot happen, but there are many moving pieces, and each takes time.

In any real estate transaction there is price and then there are terms and conditions. The latter can be as important, and often more important, than the price.

A building listed at $3.5 million might be sold for $3.3 million with a quick sale (about 60 days) with no financing contingencies. A higher price might be available, but if it takes that buyer six months to a year to get to the closing table, the seller might net less money, given the cost of carry (mortgage, insurance, real estate taxes, utilities, maintenance) and then repairs and replacements turned up by the buyer’s building inspections.

This alludes to the proverbial “bird in the hand” vs. “two in the bush.” As a commercial real estate practitioner, we constantly counsel and educate our clients about the vagaries of the market.

One other thing: It is cheaper to carry an empty building in summer, than in winter (heat, frozen pipes, snow plowing and sometimes the expense of hauling the plowed snow off- site). So if you have a building to sell, think about getting it done before the snow flies! 

Bill Norton, president of Norton Asset Management, is a Counselor of Real Estate (CRE) and a Facilities Management Administrator (FMA). He can be reached at wbn@nortonnewengland.com.

Categories: Real Estate