If you own the property that you are contemplating moving from, you will need to think through a few additional considerations. Owners of industrial buildings sometimes have outstanding mortgages, will most often need to sell their existing property in order to have the funds available to purchase their new property, and will likely need a new property loan. Let’s break down each one of these:
A few key questions to start with:
- What is your outstanding mortgage amount?
- When do you sign your last promissory note?
- Is your loan assumable?
- Does your loan have a payment penalty?
You should factor all of these into your analysis to know the cost of paying off your existing loan and how you’ll approach your new loan. For example, if your current mortgage is assumable, you might be at an advantage as you can offer your buyer the ability to take over your loan if the loan terms are more favorable than what is available in the marketplace. If your current mortgage is less than three years old, it is common to have a prepayment penalty that is due upon sale of the property. Knowing how much this prepayment penalty is will allow you to go into a transaction having a good feel for how much you will net after expenses.
All of the same physical condition assessment items (discussed in What is the Goal of Reviewing A Lease?) are relevant to owned buildings. The lens through which you view the findings of these assessments, however, is different. When you sell a property, you won’t be held to account by the landlord. Instead, you will be held to account by the perspective buyer and their inspector. You will have to figure out where you are comfortable on the spectrum of repair for every property owner has a different approach to selling property. Some sellers repair or replace specific failing building systems, others take care of deferred maintenance or renovate prior to putting the building up for sale, and some take a hands-off approach and attempt to price in the condition of the property.
Most industrial property owners still occupy the property and are too focused on their company’s operations to invest in extensive renovations. There are two primary schools of thought on how to approach property sales:
- Make sure you deliver everything in proper working order or
- Offer the property “as-is, where-is, with all faults.”
One would think that “as-is” includes having everything in good working order, but that is not reality. For example, let’s say that you operate your business out of a 100,000 SF building with 9,000 SF of office. With the advent of e-commerce, you have shifted your business model to online sales and no longer have a large inside sales team. As a result, you removed 5,000 SF of office to make room for more racking and more inventory. When you demolished the excess office, you removed the HVAC ducting and left the unit on the roof in case you needed it, or a future owner of the property ever needed the HVAC. But that was three years ago. You haven’t thought about it since. Will you have your HVAC guy go up there and see if the unit is working? What if it needs $2,000 in repair? What if you need to replace the unit? Being aware of items like this in advance is helpful.
Once you have a good idea for the current condition of the property and how you will deliver it to the market, it is time to assess the market value. You might have a recent appraisal from your bank if you refinanced recently. Reach out to your trusted broker to give you an opinion of value. A broker opinion of value will include a list of properties that are currently on the market that directly compete with your property, along with a list of properties that have recently sold that are comparable to your property. It may also include new developments that are going to be coming to the market during the time that your property is on the market.
As a broker, my job is to think about how relevant each competing property is to the property we have for sale. A high-level broker opinion of value should consist of an analysis of the competitive landscape. You should also expect your broker to assemble several scenarios that can maximize the property’s value and to create an action plan that will include how the broker is going to achieve these results. It is crucial when bringing an industrial property to market, to accurately forecast the specific demand for that type of property. For example, a few feet difference in ceiling clearance changes the entire market for a building, as does column spacing, yard size, parking, etc. This property nuance is where the value of an early property assessment pays dividends as not all buildings are comparable. Each building has 80% unique attributes that may or may not be as attractive as the property we have to sell.
Most clients use these broker opinions of values, along with a “net sheet” from an escrow officer, to calculate their net proceeds. Net sheets are worksheets that take the total proceeds from a prospective property sale minus all of the costs of the sale. Costs can include the payoff of an existing mortgage, title and escrow fees, brokerage fees, security deposits if there is a tenant in the place, property tax prorations, etc. Net proceeds calculations give you a forecast of how much capital you will need to finance your next property.
What I have found is that there isn’t a “for sale by owner” market when it comes to industrial real estate 99.99% of the time. The reason? Selling an industrial property can take months to years. Business owners don’t have that kind of time to devote to the process. Selling an industrial property can also require an extensive set of relationships with other companies, developers, bankers, and within the brokerage community. Business owners are sophisticated, experienced, and successful. They could likely figure out their taxes and negotiate their legal agreements and get by, but they don’t. They educate themselves, work with professionals, and then use their self-education to hold their partners to a higher standard and to elevate the conversation with their partners. Even large public companies that have corporate real estate directors and real estate departments don’t rely solely on their internal staff for representation, and especially on the acquisition or disposition of industrial property. It is reckless to do so. You have a responsibility to your shareholders to make sure you utilize the organization’s resources in a manner that provide the maximum value. This value is not achieved with a do it yourself approach.