Commercial Real Estate
Commercial Property Sales While Tenants Are Present
Owners of commercial real estate are typically in an excellent position to sell their investments. They need only remember why it was that they bought that specific piece of business property.
What gives? Given the high likelihood that any new commercial property investors considering the property would have a similar mindset, investors who are aware of this may tailor their marketing to attract the ideal buyer.
The value of the commercial property investment has almost certainly increased over time owing to simple market appreciation. Now that reliable renters are already in place and showing no signs of wanting to vacate, the investment opportunity has the potential to improve even more.
We'll discuss the upsides of selling a commercial property with renters, as well as some of the more prevalent challenges that come up in this context.
Length of a Typical Lease
The numbers above show that this isn't a major concern unless tenants have a low turnover rate. A business property with tenants who have signed leases lasting at least five years is more appealing to a commercial property investor because it demonstrates stability.
When looking at longer leases, it's important to know how many tenants departed at the break clause, how many stayed until the conclusion of their lease, and, ideally, how many elected to renew their lease.
The average lease term for tenants at the business property in issue may be calculated by adding and dividing the aforementioned statistics. Fewer tenants on longer leases might be more appealing to investors than a larger number of tenants with a higher vacancy rate.
This is especially true for the business owner who is not interested in becoming a "hands-on" landlord. They don't want to have to constantly market the space and show it off to potential tenants, and while they could hire a commercial agent to do so, doing so would cut into their profits, making the commercial real estate and business model less appealing.
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Some commercial brokers recommend waiting for a lease to expire before selling a property if the lease's termination date is within the next three to six months. This, however, just simplifies their lives, since they no longer have to coordinate showings with the current renters before showing the home to potential buyers.
Yet, a commercial property that already has reliable tenants in place might be seen as much more than just a structure; it can be seen as a viable company. The commercial real estate investor is in a position to dispose of the venture as a going business.
Documentation is Essential
This is especially helpful when trying to sell office space that already houses many tenants. Potential purchasers may be put off by the fact that the retail establishment is not at capacity at the time of sale. After all, if a prospective buyer tours a building and discovers that it is only generating 60-70 percent of its rental income potential, the buyer is more likely to look elsewhere or make a lowball offer because they assume the seller is in a weak position.
However, it is possible that several tenants' leases expired around the same time the commercial property owner decided to put the property on the market, so they amicably parted ways. The tenants, for example, may not have been keen on the prospect of a new landlord.
This is why proof of the occupancy rate over the whole time the property was owned must be provided. Investors will know they are making a good bet if they observe that the property consistently has an occupancy rate of 85 percent or above.
Even if a commercial property investor is confident that monthly expenses can be covered by rental income from current tenants, he or she will still want to maximize their return on investment, so the forecasted monthly income will be a key metric. This number should be readily available and verifiable by the buyer's accountants or lawyers.