Top Seller Pitfalls
- Under/Overpricing Your Property: Pricing a property requires a great deal of expertise including appraisal methodology, and knowledge of comparable sales, current market trends, financing trends and more. It’s wise to leave some room to negotiate however and underpricing a property is an obvious mistake. Overpriced properties lose traction in the market and this momentum is difficult to re-attaining later by way of a price reduction.
- Ineffective Marketing Materials: Your property deserves the very best in effective marketing materials, exceptional photography, and a well thought out due diligence process. Its your Commercial Realtor’s job to package your commercial real estate in a way that attracts a larger audience and results in a faster sale.
- Hiring a Non-Responsive Broker: Is your next sale going to happen because of your realtor or in spite of your realtor? Issues arrive in negotiations and due diligence processes and it takes hustle and responsiveness to find creative solutions that make the deal happen.
- Lack of Broker Cooperation: We all know that the more buyers looking at your property often results in a faster sale at a higher price. It’s important that your realtor cooperate with other brokers in the community and share market commissions with others. Peter Bouchard has a track record of cooperation and this drives better results for his clients.
- Poor Documentation: A well worded agreement drives a smooth transaction and avoids wasting time on a Purchaser that will not go the distance on your property. Each agreement should structure due diligence in the shortest time possible and should factor in the appropriate deposits and Purchaser commitments. Peter Bouchard has experience drafting thousands of agreements which maximize value and avoid many common pitfalls.
- Poor Negotiation Strategies: Corporate Accord utilized many effective strategies to maximize your sale price while structuring a win-win deal. It’s important to be aware of both your “Best Alternative To Negotiating an Agreement” and the buyers BATNA which helps bring clarity and direction to the negotiation process.
Top Buyer Pitfalls
- Missing out on the right deal: Many times the best deals are sold quickly or are sold premarket – it’s important to work with a commercial realtor who has great connections and quick responsiveness when timing counts. Peter Bouchard reviews new commercial real estate listings on a daily basis and helps clients acquire many properties “premarket”. We can provide an auto email service which emails our clients immediately when their target properties that the market.
- Vacancy after purchase: Are you working with a commercial realtor that can keep your properties full? Corporate Accord Realty has a long track record of after sales support in terms of lease up and renewal assistance. After all, extended vacancy diminishes the return on every investment.
- Poorly documented agreements: Does the purchase agreement specify what happens if an unexpected cost arises? A well-documented deal clearly explains what is included and what is not. Are the subject removal dates realistic?
- Renovation and Construction Cost Issues: Construction and renovation costs can be a significant component of an acquisition. It’s ideal to work with reputable contractors and have reliable estimates in terms of timelines and costs before removing subjects.
- Due Diligence Issues: What homework you need to do before subjects are removed and you take on your new investment? Has the agreement incorporated all of the necessary due diligence? A Corporate Accord we have checklists and review the questions you need answered, the projected timelines and incorporate this into effective purchase agreements.
- Lack of Investment Strategy: An ideal investment will fit your investment strategy in terms of future land use, cash flow versus appreciation, risk tolerance and property management complexity – it’s important to discuss your needs and preferences early on.
- Initial Offer Is Too Aggressive: Often buyers pay too much or miss out on the property by starting with an overly aggressive offer. It’s a better idea to map out a negotiating strategy that reflects comparable sales and is specific to each individual purchase.
- Financing Issues: It’s important to evaluate different sources of financing, their timelines, strengths and weaknesses and how this can benefit the buyer.
- Lease Analysis Issues: Rental agreements are the foundational value of most commercial real estate investments. Lease rates can be above or below market and the leases may feature weak covenants, have termination options and other terms that greatly affect the overall value. Our investment clients appreciate our leasing expertise – as a group we discuss whether it will be a challenge to maintain or improve the existing rents.
Here’s a quick summary of sale terms that are important for sellers and buyers to be familiar with:
CAP Rate (aka Capitalization Rate)
The net annual income of an investment divided by its current value. CAP Rates vary from lower rates on multifamily (lower risk) assets to higher rates on riskier commercial investments with less land. For example, an investment with a price of $2,500,000 and an annual net rent of $150,000 has a CAP rate of 6.0%.
Cash on Cash (aka Equity Dividend Rate)
The rate of return on the equity portion of an investment taking into account periodic cash flow and proceeds from the sale. For example, an investment requiring $900,000 down payment that has an annual net income after mortgage $105,000 has a Cash on Cash of 11.6% assuming no additional capital appreciation.
Gross Rent Multiplier (GRM)
The sale price divided by annual gross income for an investment. For example, an investment with an asking price of $2,500,000 and an annual gross rent of $190,000 has a GRM of 13.1.
Net Operating Income (NOI)
The is the net income from a property or business after deducting all building expenses (but before taxes and financing expenses) from total revenue (gross income). This is often expressed annually and is a key input into property valuation.
Option to Purchase
An option to purchase establishes a right for a potential buyer to acquire property for fixed-price within a specified timeline. This contrasts with a right of first refusal which gives a party and opportunity to acquire property in the event the current owner wishes to consider another offer.
Right of First Refusal
A right of first refusal gives a prospective Purchaser an opportunity to acquire a property in the event the current owner wishes to consider another offer. It is often for a set time frame and specifies that the terms of the other offer must be matched by the RFR perspective Purchaser.
Sale and Lease Back
This occurs when the Vendor or property stays on as a tenant after the closing – there are many situations where this can be a win-win adding value for both the seller/tenant and new investor.
Closing costs on an acquisitions vary and often include Property Purchase Tax, legal fees, appraisals, financing fees, inspections and more. It is important to budget for these items as well as other items on the Statement of Adjustments.
Other sale and purchase definitions
These additional items can be explained during the sales process:
- Diligence periods
- Termination options
- Tenant covenant issues
- Lease segment absorption
- Triple Net budgets
- Land title issues
- Signage and parking plans
- Covenant issues
- Inspections and construction
- Market rent analysis
- Zoning and OCP Issues
- Economic life expectancy
- Optimal financing structure
Top Landlord Pitfalls
- Excessive risk due to weak covenant – Getting a good deal on the wrong location does not serve your business interests. What is the traffic counts in your area?
- Overly Aggressive Lease Rates: It’s wise to leave some room to negotiate however overly aggressive lease rates often extend vacancy unnecessarily and it’s extremely difficult to recapture extended vacancy by way of increased rents. The optimal lease rate will vary based on market conditions but it’s important to have a strategy in place that accounts for competing options, average time to lease, and allow for some flexibility depending on each prospective tenants and negotiation strategies.
- Excessive risk: It’s critical to understand the tenants financial strength and the extent of their commitment in terms of covenant and/or guarantor. This needs to be analyzed relative to the length of lease, the extent of Landlord inducements and the timing of Landlord inducements to ensure that risk is minimized for the Landlord.
- Use and exclusivity issues: Will your next tenant fit with the mix of your center? It’s important to understand the issues related to providing exclusivity’s the tenants. There is a great opportunity to build a proper tenant, benefiting the tenants while maximizing the value of your investment.
- Inflationary issues: Rent increases have a major impact on the future valuation of your property and it’s important to analyze future cash flows relative to expected inflation.
- Ineffective Marketing Materials: Entrepreneurs are busy and they are attracted to sites that have organized information on your property ideally including exceptional photography, costing information, floor plans and other essential details. This has been a key tenant decision determining factor on hundreds of deals that Peter Bouchard has put together.
- Hiring a Non-Responsive Broker: Is your lease sale going to happen because of your broker or in spite of your broker? Issues arrive in negotiations and due diligence processes and it takes hustle and responsiveness to find creative solutions that make the deal happen in a competitive market when timing is key – and timing is always key!
- Lack of Broker Cooperation: We all know that the more tenants looking at your property often results in a faster lease up at a better lease rate. It’s important that your broker cooperate with other brokers in the community and share commissions equally with others. Peter Bouchard has a track record of cooperation and this drives better results for his clients.
- Poor Documentation: Letters of intent, offers to lease and leases can be complicated documents however Peter Bouchard has experience guiding thousands negotiations to well-documented deals that cover off all of the important economic factors and are the foundation of a smooth transaction and optimal relationships between landlords and tenants.
- Poor Negotiation Strategies: It’s important in leasing to learn about what’s important to the tenant as there is lots of opportunity to structure win-win deals in leasing environments. There are benefits to having Corporate Accord guide you through this process and sharing the experience of a multitude of past negotiations to add value and put together a deal that maximizes the value of your investment.
Top Tenant Pitfalls
- Sizing issues: Is your business expanding or stable? A knowledgeable commercial realtor can help you develop strategies such as termination options, relocation options or expansion options that help you avoid being pinched for size or wasting space.
- Leasing the wrong “exposure” fit for your business: Getting a good deal on the wrong location can be a costly mistake and does not serve your business goals. Target properties with general location, retail traffic counts, neighborhood draws, and parking that fit your brand.
- Facing unexpected costs: Make sure you’ve done your homework to accurately estimate or ideally fix your renovation costs and be sure to verify triple net estimates prior to subject removal.
- Poorly worded agreements: Ensure that all important economic items are captured in your rental agreement. Who pays for unexpected costs? Your rental agreements are some of your more important business documents and it’s important to understand it thoroughly and make sure it’s well worded and covers off your understanding accurately.
- Zoning issues: It’s critical that your commercial realtor understands the zoning in your area to ensure that your focusing your efforts on suitable properties and to provide direction when it comes to gray areas.
- Renovation issues: Ideally you can find a perfect layout requiring very few renovations. When this is not available we need to calculate the cost of renovations and factor this into the selection of your ideal location. It helps to be guided by commercial realtor with excellent construction connections as well as the knowledge of general construction costs.
Here’s a quick summary of leasing terms that are important for landlords and tenants to be familiar with:
Base Rent (also known as Net Rent or Minimum Rent)
Pre-agreed upon rent amount. (to Bank mortgage and Landlord profit)
Lease Term and Commencement Date
The Term of a lease is typically the period of time in which the tenant commits to renting the space and rent is pre-agreed upon – the most common terms are three, five and ten years which offer the landlord and tenant a reasonable period of time to amortize setup and construction costs. Lease agreements also specify the Commencement Date which is typically the date.
Landlord Improvements | Tenant Improvements
Another essential term of any lease agreement. It is important to clearly state in what condition the premises is provided to the tenant, which party does what work and when. This is a highly technical aspect of leasing that necessitates clear and detailed lease documentation.
Other Direct Tenant Costs
It is important for agreements to clarify any costs which are paid directly by the tenants such as utilities, G.S.T., janitorial services, parking…
Triple Net (also known as Additional Rent or Operating Costs)
Varies with building but typically includes property taxes, maintenance, insurance etc. (to cover operating costs of the building)
Triple Net Leases vs. Gross Leases
Commercial leases are typically “triple net” whereby a tenant pays for a pre-agreed upon base rent plus agrees to also pay for triple net costs (as described above) which fluctuate over time and typically increase with inflation. Residential rentals are typically “gross” rentals whereby the base rent and all operating costs are pre-agreed upon (if property taxes go up attendance payments still stay the same).
Possession Date and Fixturing Period
Tenants typically receive the key to the premises on the Possession Date. Most landlords grant a tenant I fixturing period which is a period of time during which the tenants can set up their business without paying rent (typically utilities are payable during this period).
It is important for tenants to establish that they are able to sublet their premises in the event they outgrow their space during the term.
Other lease definitions
These additional items can be explained during the leasing process:
- Standard deposit amounts
- Free rent
- Tenant improvement allowance
- Stepped rent
- Renewal options
- Right of first refusals
- Termination options
- Covenant Issues
- Subject clauses
- Offer to lease / Lease Agreement
- Free Rent / Stepped Rent
- Signage: Pylon / Awning / Box / Portable / Windows