Pricing to Sell...(Sellers Only)

Once the decision’s been made to put your commercial building on the market, the Million Dollar question that arises is – what sort of asking price do we set? In early blogs we’ve discussed valuation techniques, made suggestions relative to interviewing brokers, and even covered the topic of formal appraisals. All of this should have put you in a position of understanding the value of the property.  Now the moment of truth is here and its time to establish a price to market the property at.

Before you do set the price, some final questions worth considering:

Market Turnover – what sort of commercial property turnover rate is your area exhibiting?  How long has it taken to sell similar buildings in your market – on average 2 months, 6 months, 2 years...?

Commercial Financing – is it available through conventional means and at what sort of rates/terms?  Financing a commercial property is generally necessary, and we need to understand all of the options available.

Buyers Market vs. Sellers Market – what sort of market is your area experiencing?  In short, more sellers or buyers, price growth or decline, and general market activity/traffic?

Local Economy – is it expanding or contracting, is unemployment rate lower or higher (vs. national average), new housing starts up or down, and is there population growth? Call this Economics 101 – but you need to be in step with your economic (market) realities.

Competitive Positioning – do you have a competitive advantage relative to competing properties in the market?  Better location, superior building quality, discernable site advantages … giving you the ability to promote better value for your property?

Finally, ‘Serious Buyers’ tend to prefer ‘Serious Sellers’, and vice versa. Your asking price should reflect the fact that you are serious, and that you have priced your property accordingly. Give your asking price careful consideration, in order to put yourself in the best position to successfully sell your property.

As always, consult with experienced commercial brokers within your area in order to determine a ‘Pricing to Sell’ strategy.

Part 2 - VTB 2nds & Risks/Rewards

Generally 2nd mortgages have more risk than a 1st mortgage. For a Seller, the major risk is in the event of default. In a default situation, the equity position of the 2nd mortgage is behind the equity position of the 1st.  At the time of liquidation (either through a Power of Sale or Foreclosure proceeding), any equity would only be realized after the 1st lender is repaid in full (inlcuding any associated costs).  You may also be behind any unpaid property taxes, which have priority and can serve to squeeze your equity position even further.

Enough said on the negative risk side.  There may be a legitimate case to consider holding a 2nd - consider the following:

i) Adequate equity exists in the property to hold a 2nd and at the outset appears 'secure' position wise
ii) For the return it provides - often 2-3-4% higher than a 1st
iii) Property cannot be readily financed any other way - due to its condition, unavailable bank lending, poor market conditions, etc.
iv) Familiarity with the property and comfortable with its value overall
v) Confidence with the Buyer to be able to meet the total mortgaging obligations (both 1st & 2nd)
vi) Possible tax benefits on Capital Gains (see your accountant) and for the cash flow the mortgage provides

VTB 2nds are not the solution for every seller, but there may be sound reasons to consider them in certain situations. Most importantly, do your due diligence with respect to the Buyer - meaning are they a good credit risk, capable of servicing the total debt obligations of the property, have good intentions and the right plan for the property?...

As always, consult with experienced commercial brokers in your area to learn more about the opportunities for VTBs.

Vendor Take Back Financing - Good Idea on Commercial Properties?

Lots of points to discuss on this subject -- but let’s begin by saying a VTB mortgage maybe a good idea for both Buyers and Sellers. In some cases, it may infact be the only way to finance a sale, given the lack of commercial funding available through institutional lending. 

The mechanics of negotiating a VTB are basically outlined in the Agreement of Purchase and Sale.  Meaning all terms are set out – including downpayment, mortgage term/amortization, interest rate, open/closed status, prepayment rights/penalties to discharge (if any) etc.  Other items may include – personal guarantee of mortgage, provisions to renew at the expiration of the 1^st term, and any other special term(s) which may apply.

Why a VTB may benefit the Buyer:

i)                    Typically reduce the soft costs/fees associated with conventional financing

ii)                  Appraisal/Environmental expenses may be avoided

iii)                Terms (interest rate/term/downpayment) negotiated with the Seller

iv)                Ability to improve leverage or allowing to buy a higher priced property

v)                  Easier to finance ‘non-traditional’ or ‘distressed properties’

vi)                Avoid time involved in obtaining institutional approvals (several weeks to months)

vii)              If Open Mortgage (involves no penalties for early pay out)

Why a VTB may benefit the Seller:

i)         Provides a cashflow based on a set rate of return

ii)        Viewed as an investment option for your capital

iii)       Mortgage is held on a property which you have a vested interest in

iv)       May assist in achieving a higher sale price

v)        Can help in deferring capital gains tax in certain cases

vi)       Can help sell properties in a slow market, by built-in financing

vii)      Terms (interest rate/term/downpayment) negotiated with the Buyer

More on VTB mortgages in our next blog - including VTB 2^nd  mortgages , other risk factors for Buyers and Sellers, and remedies for default.

Again, seek out experienced commercial brokers within your market, to best review the prospects for VTB mortgaging options within your market.   To learn more about our experience and background, click here.

Property Survey - Why do you need one?

Seems like any requirement that adds cost to a real estate purchase, is often met with reluctance. Survey costs generally fall into this category - but there importance on the Buy-Side should never be overlooked.  Outside of the actual deed, an ‘up-to-date’ survey is probably the 2^nd most important document a Buyer needs when closing a deal.

Surveys are best described as ‘an overhead drawing of the subject lands' - in this case the property being purchased.  It should show not only the exact property boundaries, but any easements/encroachments/public right-of ways, which may affect the land. In addition, it identifies the exact location of all buildings/improvements on the property, revealing clearly the set-backs from the various lot lines. Other items which often appear include overhead lines, closed alleys, pools, fencing, porches and yard sheds.

Can we rely on an existing or original survey as provided by the Seller?  It all depends on how current the survey is today, and if no significant changes have occurred on the property. If an out-building has been built, fencing altered, building addition, etc, best practice is to order a new survey. Up to date surveys will and should reveal problem issues, which are always best rectified prior to closing any sale. 

Can we opt for Title Insurance vs. a Survey?  Best to ask your lawyer on this one – but in our view, better to have a current survey. Bear in mind that title insurance will be dealing with any problems ‘after the fact’, whereas a survey would have revealed any such problems prior to any sale.  This is only sound due diligence when buying a commercial property and should be viewed as such.

Again, seek out experienced commercial brokers commercial brokers within your market, to best represent your interests in acquiring any property.  To learn more about our experience and background, click here.

Special Guest Blog Post by Joe Kireta: Appraisal Institute of Canada

As experienced commercial brokers, we work in conjunction with appraisers on many of our deals.  Naturally, we feel it appropriate to introduce our readers to this area of the real estate business.  Today, Joe Kireta AACI with Ray Bower Appraisal Services Inc, will provide us a guest blog post on the Appraisal Institute of Canada:

When the market's changing, who can you trust? Call the real estate experts, Appraisal Institute of Canada (AIC).  We are Canada's leading authority in real property valuation. Make wiser  choices with in-depth analysis, market insights and practical solutions - from acquisition and development to management and disposal.

Founded in 1938, AIC is the premier real property valuation association in Canada. As a self-regulating professional organization, AIC grants the distinguished Accredited Appraiser Canadian Institute (AACI) and Canadian Residential Appraiser (CRA) designations to individuals across Canada and around the world.

AIC members are highly qualified valuation professionals who undertake a rigorous program of professional studies, examination and experience before being granted a designation. The Institute also supports the principles of lifelong learning through a mandatory continuing professional development program and requirements to complete our professional practice seminar on a regular basis. These ensure that members have the most up-to-date education and skills to offer their clients.

The education, experience and life long learning requirements that  AIC has put in place ensure that the real value expert you hire will provide you with the most professional valuation expertise and opinions in the marketplace. Put your trust in the most highly regarded designations in the real property marketplace.  Get real property experts working for you; consult an AIC professional.

For further information on how a real estate appraiser can be of assistance to you, you can visit the Appraisal Institute of Canada website (AIC) http://www.aicanada.ca

Thanks to Joe for his contribution today.  To find out more about his appraisal services, call 519-981-8896 or email connect@joekireta.com.

For Sellers Only – Interviewing Brokers

Commercial property sellers need to review their options - AKA, interviewing the most qualified commercial brokers in your area.  Beyond having the right credentials and background in your market, their services should include much of the following.

Check list of services:

1)      A current analysis of market conditions/trends within the area

2)      Supporting data based on price/ft. and income analysis comparisons

3)      A marketing plan which targets the property to right users/investors

4)      Aggressive promotional plans – including website marketing, signage, flyers, video tours

5)      Financing options – including both institutional, private, and VTB

6)      Negotiation strategies utilized

7)      Working arrangement with the local broker community

8)      Ability to service premises tours/viewings

9)      Transactional/contract expertise (documentation prep)

10)  References that can be reviewed and called upon

Beyond the services, a discussion of brokerage fees involved is certainly appropriate.

Typically this will be % fee structure based on the selling price of the property.  It could also be flat fee based, depending on your area and based on what you are able to negotiate. Fees will and do vary from broker to broker, even within the same area. Best advice here - is interview a few of the best qualified brokers in your area and make your selection based on your specific needs. But as a caution, remember that old saying – 'you get what you pay for' - which certainly applies in the world of commercial real estate.

All of the above, although not necessarily a complete list of services you need to consider, gives you a solid basis to interview candidates. Bottom-line - a Seller must be confident in the ability of the broker to 'GET THE JOB DONE'.

Again, seek out experienced commercial brokers within your market, to best market your property.

Zoning - Permitted Uses

In purchasing a commercial building, you need to pay particular attention to the zoning bylaw, and how it applies to your use. Often times, assumptions are made regarding the zoning on a property – perhaps it is even zoned commercial – but at some later stage, you discover the applicable zoning bylaw does not permit your specific use. After the fact this can become very problematic and often costly to correct.

Best practice here is to confirm with the local municipality, that your USE IS PERMITTED WITHIN THE APPLICABLE BYLAW. If there is any doubt, second opinions are good. Best options then are with your solicitor or officials within the municipality itself.  Municipalities will typically want any requests for a zoning confirmation (or interpretation on a use) in writing – but will likewise respond in writing, which is obviously preferred.

Other factors which you may need to consider:

i)                    Does the existing bylaw allow for a change(s) in the business?

ii)                   Are there parts of the bylaw you cannot comply with (ie. parking)?

iii)                 Is the bylaw consistent with the neighbouring district?

iv)                 Is the bylaw marketable for purposes of re-sale?

v)                  Are there any pending changes (municipally) to the bylaw?

vi)                 Costs associated with obtaining a re-zoning should it be needed?

On the final point above, this assumes that the site does not allow for the use which you propose. Bear in mind that in order to amend the zoning, you are likely looking at months, not weeks, to go through the municipal process.  This in turn adds a further ‘major condition’ to the Offer to Purchase, which obviously has implications with both the Seller and likely your negotiation strategy. If it then becomes a reality with your deal - make sure you are clear on the costs, the process, and any other municipal requirements which apply.

Again, seek out an experienced commercial broker with strong local backgrounds, to assist you in the area of zoning compliance with respect to your purchase.