6 IMPORTANT PRINCIPLES OF NEGOTIATION IN ACQUISITION AND DEVELOPMENT OF COMMERCIAL REAL ESTATE

Many starters in investment contemplate building, renting or buying a house. However, this is not the only way, nor always the most profitable way for investors to benefit in the long run. Investors may also consider purchasing a commercial property. The rent and income from the property can enable investors to realize their dream of owning property.

A commercial property enables investors to get involved in various activities. Investors must be meticulous while processing a commercial investment as it requires significant financial transactions.

Commercial Property Negotiation is basically negotiating the purchase of a commercial asset. Buying commercial real estate could be the biggest and riskiest transaction you ever undertake. However, many investors make costly mistakes that can affect their investment and saddle them with unforeseen expenses.

It is important to take time to properly prepare for your negotiations for a real estate purchase. “Buying real estate shouldn’t be a last-minute decision. You need to do your homework to be well prepared to negotiate with the vendor. Rushing into a purchase can leave you stuck with more building space than you need, an unexpected environmental mess or no bank financing.

PRINCIPLES OF NEGOTIATION IN THE ACQUISITION AND DEVELOPMENT OF COMMERCIAL REAL ESTATE

1. Think about your needs

An essential starting point to help you negotiate more effectively is a thorough evaluation of your business needs and how the building’s current setup might meet them. Make a list of what you need from the building.

Location is usually a prime concern in commercial real estate. Related issues include accessibility, parking, and public transit, convenience for shipping and receiving needs, nearby services, zoning issues, and room to grow.

The amount of space you need is also key. Don’t forget to anticipate growth. Before deciding how much is enough, analyze how your current workspace is organized. Could you rearrange it more efficiently to reduce your space needs or avoid moving altogether? An operational efficiency expert may be able to help you negotiate well and find major space savings. Using your facility more efficiently can not only reduce your space costs but also make your operations more productive and profitable.

2. Set your budget

Setting an effective budget upfront can give you more negotiating power with the seller because you will be clear on what you can afford. Speak with the accountant and financial partners on your commercial real estate advisory team early on to determine your budget and get pre-approved for financing.

Be sure to ask for the right level of financing and explore all your real estate financing options. Remember that the budget has to cover more than just the building purchase price. Other costs include due diligence (such as environmental and structural assessments), renovations, moving, downtime during the transition, land transfer tax, legal fees, any realty commission and an amount for contingencies.

Also, ask your bank how much time it will need to review the transaction before agreeing to financing and what conditions you will need to meet. For instance, you may need to provide an environmental report from an authorized assessor and up-to-date financial statements from your business.

3. Find good advisors

Find a good commercial real estate agent who understands your needs and knows the local market, including unlisted properties. An agent can be critical in your negotiations with vendors. Ask for recommendations from your accountant, lawyer, banker, advisory board, and other real estate professionals.

Ask your agent to research market real estate values for the kind of space and location you want. Compare those values with your budget to see whether your expectations are realistic and ensure you’re properly informed to talk to vendors.

A good lawyer can also be crucial to negotiating a beneficial purchase. It is best to hire an actual commercial lawyer who deals with this kind of transaction on a daily basis. It may cost a little more than a general lawyer, but it’s worth it.

4. Investigate your site thoroughly

Look carefully at any promising properties before making an offer. The better informed you are, the more ammunition you’ll have to negotiate with the seller.

For starters, be sure to ask about allowable uses, to make sure your business can operate there. If you expect your space needs to grow, also check whether you can expand within the prospective space. Some locations may not allow for building expansion because of municipal planning restrictions.

You may want to bring a contractor and key employees to look over the space. Discuss what renovations are needed to accommodate your business and repair major components, such as the roof, foundation, plumbing, or electricity. Get an idea of the costs to confirm they fit your budget, and adjust your offer price, if necessary. Find out the building’s age, who the neighbors are, and whether the area is declining or developing.

Find out whether the building has tenants and, if so, when leases expire. Also, ask the seller about any other factors that could affect the property’s value. These may include environmental, structural, zoning, permit, and title issues for example, encroachments (structures that cross onto a neighbor’s property) or easements (a right to use part of a neighbor’s property). It’s best to find out about serious issues early on, not a few days before the closing date, when they can jeopardize financing or the entire transaction.

5. Make an effective offer

Now that you’ve done your homework, use your findings to prepare an offer that reflects your budget and needs. When you do so, consider the following factors. You can sometimes obtain a better price and shorter closing period if you make an offer with fewer conditions. Be sure not to waive structural and environmental assessments, which are vital due diligence conditions.

You may want to ask for seller financing. It’s not uncommon for sellers to provide some of the financing for commercial real estate transactions. Some owners may be interested in a deal that allows them to sell the building but rent part of the space, where they can operate their business. Your offer should build in sufficient time for due diligence and bank financing approval. Banks often need six weeks or more to review transactions.

6. Perform Due Diligence Before Closing the Deal

Be sure to do a thorough due diligence exercise. That typically includes asking for the vendor’s property tax statements, utility bills, and a list of recent repairs and capital improvements going back five years, typically.

It’s important to also ask the seller for any recent environmental assessments to verify contamination of the site or hazardous building materials. Check to see that the assessor is authorized by your bank. If not, your bank may require another assessment by a recognized expert. You can also have an assessment done yourself if a recent or reliable one doesn’t exist.

Environmental issues are one of the biggest problems encountered in due diligence. They can affect employee health and the building’s saleability, and cause a bank to refuse financing. Due diligence is also the time to get a building condition assessment (the commercial equivalent of a home inspection); an appraisal, especially in the case of larger buildings; and a title search. For example, a title search may show the parking lot encroaches on a neighbor’s land, even if this isn’t registered on the title.

If the due diligence identifies issues, you can negotiate a reduction in the purchase price or walk away, if you’ve changed your mind about the deal. Be sure not to sign off on the conditions of the due diligence process until your bank has reviewed the contract and agreed to provide financing. Investors often make the mistake of involving the bank only after the purchase has been completed. They sometimes feel pressured to close the transaction too quickly, but the bank can refuse to finance if its review finds outstanding issues. If that happens and a business has already completed the purchase, it’s too late to go back and change your mind.

 

As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.