Prep Well and Profit: Selling Your Commercial Building
How hard could selling this place be?
27-year-old CEO Melanie Wong looked around the expansive building, which had housed her family’s business Applied Data Resources (ADR) since 2001 in Richardson, Texas. Her father had worked tirelessly to get ADR off the ground. George Wong saw potential where others did not and he had managed to work his way into the enviable position of office supplier to some of this country’s most successful companies. He had started small in 1985, believing a healthy work ethic and strong relationships would set the tone. He was right. Eventually he had bought this building and the one next to it, which he leased to a tenant. As he began to ease into retirement, Melanie had stepped up and ultimately become CEO. And here she stood, facing the gargantuan task of negotiating both buildings’ sudden sales while George was away visiting family in Hong Kong.
Connect With A Specialist
Upon his retirement, George had placed the buildings for sale with a brokerage firm. He experienced headaches and, ultimately, no deals. After six months, he had declined to renew the agreement.
“It’s so important to identify a disinterested third party you trust who specializes in the type of property you are trying to sell,” says Nat Klein, Senior Vice President of Lincoln Property Company. Klein has closed more than 900 commercial real estate transactions over the course of his career. He encourages sellers to ask around for recommendations, understanding that a great broker can connect a seller with other high quality brokers. “I will usually push off a downtown building to someone who specializes in those. Make sure you do your due diligence and hire the right sort of specialist for the property you have.”
Soon enough, an old friend approached the Wongs assuring them he was the right person to sell their building. He did just that, and far faster than anyone anticipated. They chided themselves for not asking him in the first place. Though the building had been up for sale for a while, when things began to happen, they happened fast. The family was caught off guard. George never meant to leave Melanie to handle the inspection, the closing, and the move single-handedly, but that’s exactly how the chips fell.
“My biggest lesson? I learned to approach every deal as if it’s really going to go through. Have your ducks in a row and be organized. Be prepared and have an exit strategy,” says Melanie, who is still amazed the transaction closed in just thirty short days with minimal negotiations.
The Good News: DFW Real Estate Is On A Tear
Commercial real estate in the Dallas Fort Worth area is hopping. Almost every day The Dallas Business Journal shares the good news:
From January to November 2014, DFW added 441,000 new jobs, which is 1/3 of all new jobs added in the United States.
Development plans for stunning high rises and Billingsley’s exciting rejuvenation of entire city blocks in Dallas spur on the commercial real estate boom. Explosive growth along the Dallas North Tollway and the arrival of heavy-hitters like the world headquarters of Toyota and the famed Nebraska Furniture Mart leave little doubt that this is a great time to sell a commercial building. The cranes seem to crowd the skylines these days.
“Luckily we see the leasing velocity helping to push the capital markets, and helping to push people’s underwriting. Buyers are interested in Dallas and being aggressive on pricing because they feel good about the prospects of leasing and releasing the buildings in virtually every sub-market,” says Evan Stone, Managing Director of Jones Lang LaSalle Inc (JLL), a professional services and investment management company specializing in commercial real estate.
Necessary Repairs: What To Do?
When sellers look around their buildings, they often wonder how to prioritize repairs. Should they replace an ailing HVAC system? Broken window seals? Is it necessary to address each repair before placing the building on the market?
“No, it’s okay to leave a few small things undone, but not being upfront about the status of your building is fraught with risks,” says Stone, whose own storied career encompasses the sale of properties like Galleria Dallas and Plaza of the Americas. In total, Stone has sold nearly $1 billion of single tenant and sale/leaseback transactions.
While it’s acceptable to leave a few strategic repair items for the negotiating table, Stone feels sellers should understand the value of their asset and openly communicate about the building’s deferred maintenance status. If roofs and chillers should have been replaced years ago, Stone suggests sellers make those changes or provide detailed recent estimates for replacements. He stresses the importance of transparency and great documentation to enable the buyer to conduct his due diligence and get an accurate view of the asset.
“This is the best way to have your transaction go without a hitch. There is no stupid money out there. I believe an educated buyer is your best buyer and a surprise in due diligence is not a good thing for anybody,” says Stone.
Do A Document Review of Leases
Make sure all of the building’s leases are available, current, and valid. Buyers expect and deserve to know what they are buying. Stone suggests sellers do a document review in which they verify all the amendments are signed, all the start date letters are in order, and that the certificates of occupancies are readily available.
The Roof Is A Commercial Building’s Most Valuable Asset
Quality commercial roofing companies offer building maintenance. Keep the roof in great condition to avoid costly repairs down the road. A well cared-for roof reflects well on the seller.
“You want to be perceived as someone who clearly cares about the property and has made the effort to keep the roof under warranty and well-maintained. The appearance of a leak, no matter how small, has the potential to shake a buyer’s confidence and dupe the deal,” says Steve Little, President of KPOST Company, a commercial roofing company recognized as an industry leader thanks to its highly effective preventative maintenance track record, innovative leak detection methods, lightweight concrete solutions, and building envelope maintenance.
Tips For Preparing Your Commercial Building For Sale:
1. Make sure all mechanical systems are in good working order. Consider hiring an inspector to gain an objective view of the building’s condition.
2. Roofing companies, like KPOST Company, offer detailed roof and building envelope assessments and will provide documentation for all completed repairs and estimates.
3. Now’s the time to plant flowers and clean up the landscape. Drive up appeal counts.
4. Know how much income your building generates and be prepared to share documentation to this effect. Its income, minus its overhead, helps lenders to determine the building’s value.
5. Be aware of the tax implications of selling a major commercial building. Hire a seasoned accountant to advise you on the ins and outs of capital gains taxes, state taxes, and recapture taxes, if relevant.
6. Don’t underestimate the value of social media. A few well-placed posts on social networks can make all the difference.
7. As Melanie discovered, have an exit strategy in place. It’s a good idea to figure out what to do with the current contents of the building. Arrange a storage unit or office furniture consignment shop contract well ahead of time so that, when it’s go time, there is no problem clearing out quickly.
For more great tips, get a copy of our white paper “If Farmers Predict a Rainy Season, Can You Keep Water Out of Your Building?“ Download your free copy today and learn more about proper assessments and maintenance of your commercial property. Download now!