Like any investment, commercial real estate requires careful management throughout your ownership. So, when it’s time to sell, you can look forward to achieving the maximum return on your investment.
If you’re planning on selling, it’s important to understand the elements you’ll need. Including creating a strategy that can help put your property in its best light with potential buyers. You will also want to have an exit plan before you sell, including clearly knowing what to do with the proceeds to minimize taxes.
Pre-sale planning and the preparation of financials are critical components when selling your commercial property. To start, you need to get your financial and legal houses in order. That being said, no matter how well planned your exit strategy might be, it all comes down to execution!
Complex laws govern commercial real estate. It is a smart move to engage an experienced commercial real estate attorney to work with you from pre-planning through the closing. An attorney will ensure that you don’t have any legal exposure from your sale.
A commercial real estate attorney can help you with many areas of pre-planning. These include:
Commercial property will often have multiple contracts with outside vendors like food service providers, groundskeepers, maintenance staff, and other personnel. You will want to review these contracts with your attorney and determine any early-termination fees that might apply. You won’t know which contracts, if any, your new buyer may want to assume. You should be prepared to terminate long-term contracts on a date that coincides with a projected closing date to minimize fees. This can ensure that you don’t get stuck paying for services after the sale.
Your attorney can help you prepare the financial information you’ll need to provide your advisor, including balance sheets, income statements, cash flow analyses. They can also help you document and account for any improvements you have made. If your building is currently leased, you’ll want to put together that information as well.
If you have partners or your property is owned through an LLC, corporation, or trust, you will need to put together your organization’s documentation to determine who may also need to approve of a sale.
The better prepared you are before you engage an advisor (commercial real estate’s version of an agent.), the more they can help you.
Once you have done your planning and pulled together your financial information and documentation, it’s time to add a commercial real estate advisor to your team. An advisor is the commercial version of an agent. They will help your price your commercial real estate and develop and execute marketing strategies for selling your commercial real estate.
One of the biggest challenges when selling commercial real estate is correctly pricing the property. This is where your advisor is an invaluable member of your team. They will have the experience, expertise, and contacts to ensure that your property is priced correctly for the market.
Your advisor will understand the local market and have access to records for recent sales of comparable properties. They will consider many factors when determining a price. For example, they will understand legal differences like zoning regulation, differences in physical condition, location factors, and economic differences like foot traffic or traffic counts.
They will consider your property’s capitalization rate and compare it to the cap rate of similar properties that recently sold. Cap rate is a more complex calculation, but it is also an extremely effective way to determine value.
Once your property value is determined and you’re ready to list, your advisor will work with you to develop a marketing strategy for your property. Along with proper pricing, effective marketing is another area where working with a professional is much more effective than going it alone.
Your advisor will likely have marketing outlets and media that they regularly use to market their properties. This can include video marketing online, virtual walk-throughs, and other paid and free social media like LinkedIn that they will use to get the word out about your property.
An excellent marketing package will include elements like a cover page, an aerial photo of the property, the price, cap rate, and address. You also want to include a legal disclaimer from your attorney, a bullet list of property highlights, and information about the area highlighting pertinent information like highway access, amenities nearby, etc.
Your advisor will also know who is buying, what is coming onto the market, and how your property fits in. They will often have clients they can call who regularly invest in commercial properties.
It’s important to have a plan for what you’ll do with the proceeds early in the process before your commercial real estate sells. The third member of your team should be an accountant. They can work with your attorney and advisor to help you create a post-sale plan.
Your accountant, attorney, and advisor can all play a part in your post-sale plans. You will need to deal with the tax ramifications of capital gains and advise you on reinvesting the proceeds to minimize the tax impact of your sale.
Should you choose to reinvest your proceeds into another property, your attorney can make sure that you are prepared to make a 1031 exchange. As they are marketing your property for sale, your advisor can also be searching for another property for you to reinvest in.
Are you considering a commercial real estate sale? Give the Masiello Group a call today! We’re always happy to answer your questions and can give you more in-depth analysis and case-specific advice when you call!