12 Dec 5 Things to Know About Seller Commercial Real Estate
Veteran business broker Glen Cooper continued his series, “The Nuts & Bolts of Selling a Business” with a recent webinar covering the opportunities business brokers and M&A advisors have in regards to seller real estate. While there are plenty of opportunities here for you, there are also many potential pitfalls as well. In this article, we will explore his advice which is built on decades of experience.
1. The True Owner of the Real Estate
As Cooper points out, the entity that owns a given business’ real estate may not be a straight-forward issues. He notes, “You have to remember that real estate is, most of the time, owned under a separate entity than the business. This business may be a partnership, an LLC or a corporation, but there may be a separate LLC, partnership or corporation for the real estate…you need to find out what the entity is that owns the real estate and get the tax returns for that entity as well as the tax returns for the business, as you’ll need to see what they claim as expenses.”
Once more, Cooper outlines that while it is potentially lucrative to incorporate seller real estate into the process of selling a business, it is vital that business brokers understand, and respect, the complexities of that process.
2. The Role of Assessors
Part of the process of coming to better understand commercial real estate can be to have discussions with assessors. He notes that assessors will often have a great deal of highly valuable information already on file. For example, assessors can tell you what the current cap rates are as well as explain the market for a given type of building.
3. The Net Operating Income
Another important variable is for you to learn how to calculate net operating income or NOI. This is something that business brokers typically don’t have to worry about. However, the NOI does come into play in commercial real estate.
4. Unusual Leases
Business brokers and M&A advisors interested in incorporating real estate into their operations will also want to understand unusual leases. It is common for business owners to lease their own real estate. Cooper notes that all “kinds of crazy ideas, emerge.” He points out that “Some of the leases are gross leases, some are net leases. Business brokers need to understand what’s included and what is not included in the lease. And that takes some analysis using the approach of an annual property operating data form to calculate the true net operating income of the property.”
5. Be Open to Advice
In short, Cooper believes it is essential to get advice from a local commercial real estate broker. Be sure to vet that broker to determine if they are respected and knowledgeable in their field.
There are some additional points that Cooper feels that all brokers interested in seller real estate should know. First, is that most states require one to have a real estate license to list and sell commercial real estate. Obtaining that license is becoming increasingly difficult.
Likewise, it is important to charge a different commission on real estate than one would charge on selling a business. The commercial real estate commission is smaller than a business brokerage commission.
Additionally, it’s important to note that most of the time a seller may not want to sell the real estate with you. However, be sure to point out that providing a prospective buyer with the option to buy the real estate can be helpful in many ways. For example, the buyer is likely to be willing to pay more than market value for the real estate. He notes, “They will pay the most especially if you provide seller financing.” The seller also needs to understand that you are not a full-time commercial agent, but listing with you will help draw in the right kind buyer and one that ultimately buys the business.
