Two years ago, multiple bidders for commercial property in Northeast Ohio would have been unheard of. Now, market power has shifted from the buyer/tenant to owner/landlord. Vacancy rates have dipped and the quality of the product on the market has significantly decreased, says George J. Pofok, CCIM, SIOR, senior vice president at CRESCO.
“As the market and the economy continue to improve, with the lack of quality product out in the market, I think we’re going to see more multiple-bid situations,” Pofok says.
Smart Business spoke with Pofok about what to do when you’re competing for commercial property.
What determines if a property might have multiple bidders? Is it the type of building or location?
Right now, multiple offers are happening more with industrial properties as opposed to office — and a lot of that has to do with the quality of the building. Class A Industrial buildings are in limited supply. So, a property’s cleanliness, building amenities and ceiling height make it more desirable and thus more likely to be competitive.
Location is important, including freeway accessibility, being near public transportation and your labor force, but amenities to a building sometimes outweigh location. If you were to build a new industrial building today versus purchasing another facility already equipped, there are cost savings in addition to being able to get widgets to the market quicker.
How does the bidding process typically work with more than one bidder?
Everything ends up being a one or two-step process, usually. The seller might give you a revised counter or just send you a letter saying, ‘We have multiple bids. Give us your highest and best offer.’ Then, you’ll have a couple of days to a week to respond. Obviously, getting your response in by the timeline the seller dictates is critical, but the terms of the offer are what drives everything.
There can be a lot of back and forth or the seller may end up picking a lead horse, and then try to fine-tune the economics with that bidder. They may like your offer but have one objection. They’ll come back to you about that objection.
So, how can you make your offer the most attractive one?
You’ll need to consult with your broker and your lawyer, and most importantly not play games. If you’re going to play games, you’re going to lose. Many buyers or tenants still think, ‘I’m going to get this great deal on this building.’ When in fact, the market has shifted in favor of an owner/landlord.
You want to be as highly competitive and flexible as possible. In addition to increasing your offer, some advantages a buyer or tenant can use are to pay cash or increase the amount of earnest money. Earnest money is put toward the down payment when the transaction is finalized but may be kept by the seller if the buyer defaults on the purchase.
It helps if you’re able to shorten the amount of days you have requested for due diligence or financing contingency, where you apply for lending. For example, 90 days may be too long under these circumstances; something in the 45-day range is better.
Also be flexible when negotiating reps and warranties. Buyers sometimes ask for the owner to warranty and represent various issues regarding the title or environmental concerns for an extended period of time. However, owners just want to sell, cut the cord and be done. Consult with your attorney when discussing these issues. Money talks. So, increasing your offer from a purchase price perspective is critical, but it’s not the ultimate factor. If an owner has two offers and one is for $50,000 less, but the terms in the lower offer are much more palatable with less due diligence and more earnest money, he or she may be willing to take the lower offer. Sellers and landlords are going to look at everything.
Are buyers assuming more risk under these circumstances?
At times, yes, it’s riskier. You may take a little more risk than you’d prefer. If the terms of the deal get too onerous, walk away. There will be other opportunities, but it needs to make sense. That’s why you definitely want to leave the emotional part out of it. Look at it from a business perspective, and put together the best offer you can. ●
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Your property manager offers not only convenience, but also cost stabilization and a link to finding creative ways to save money without sacrificing quality of service.
“A qualified property manager should be able to distinguish the needs of both the tenants and landlord to protect the asset — whether it’s office, industrial, retail or multi-family,” says Eliot Kijewski, SIOR, senior vice president at CRESCO.
Another benefit of having a professional property manager is that he or she serves as a singular point of contact for both the tenant and landlord, which allows the property owner to invest his or her time elsewhere.
“Our property management philosophy is to think like an owner to maximize asset value,” says Judy L. Simon, CPM, assistant vice president at Continental Realty.
Smart Business spoke with Kijewski and Simon about how to best utilize property management.
What services does a property manager typically provide?
Traditionally, a property manager’s duties fall under the categories of building operations, financial management and tenant relations. He or she helps keep costs consistent, using his or her contacts to shop out needed services, whether it’s snow removal, landscaping or cleaning services, to get the best price per square foot. The manager uses those same contacts to reach out to contractors and have them bid for tenant improvement work.
At the same time, the manager is a liaison between the tenant and landlord. Many tenants decide to move because poorly managed building issues interfere with their daily operations. An experienced property manager stops potential issues from becoming large problems, which helps with tenant retention. The property manager may be working for the landlord, but he or she must maintain a good relationship with the tenants.
Property owners should have at least 50,000 square feet of space for property management to be cost-effective. Then, you can tailor the services you want your property manager to deliver.
Beyond hiring contractors and dealing with tenants, how else can the property manager assist?
A quality property manager will help maximize how your dollars are spent by providing cost savings without losing quality. For example, a manager can help you decide where, or if, you should offer an extra service or two to make the property more attractive to tenants, such as move-in assistance or security. The manager also can find savings through energy management or sustainability programs, which benefit both the landlord and tenants.
He or she can help establish contracts with vendors, whether that’s purchasing carpet, salt, landscaping material, etc., as well as assist with capital budgeting. For instance, beyond getting three quotes for a roof repair, the manager can help you decide if you want a total replacement, patching, or to replace different sections each year, in which case you can allocate funds for each stage of the project rather than write one large check.
Does a property manager have a role in lease negotiations?
Not really, although property managers can assist with lease administration and reporting. However, it’s important to remember if a property is not managed well, it drives off prospective tenants. If they pull into a parking lot full of chuckholes that hasn’t recently been seal coated or stripped, they will assume their space is going to get the same poor attention.
The saying goes: The first impression is the only impression you get. Your property manager helps with that first impression. The manager may not have a direct impact on pricing and lease negotiations, but many times the property manager will hear about expansion/renewal needs during routine tenant visits. Their experience with and understanding of the building will also help you during negotiations. ●
CRESCO and Continental Realty have joined to offer full-service property management in the Cleveland market.
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After signing a contract for your commercial building purchase, you begin due diligence, which is usually a 45- to 60-day period you and your broker use to inspect every possible issue, use or aspect of the property. There are a number of key areas to consider and you only have a limited time to do so.
“Next to negotiating the purchase price, the due diligence period is probably the most important part of the transaction from the buyer side,” says Simon Caplan, SIOR, principal at CRESCO Real Estate.
Smart Business spoke with Caplan about the critical points to check — or re-check — during the due diligence period.
Who do you check with about property use and government concerns?
Every community has different zoning codes and definitions vary from city to city. It’s imperative to check with the mayor or local zoning official that your planned use of the property fits within the current zoning and to ascertain what you need to do to get all required occupancy permits to operate your business. This would include building permits if major renovations or an addition are part of either your short- or long-term plans. It’s also important to ensure your building will pass fire and building inspections. In addition, some cities require a point of sale inspection; for the most part, these are the inner ring suburbs bordering the city of Cleveland such as Bedford and Garfield Heights.
Usually the availability of a tax abatement, income tax credits or other economic incentives are mentioned in the purchase agreement. However, the due diligence period is most likely when the incentives are actually granted.
What are some best practices to follow with the title?
Review your property’s title commitment to find problem areas that could include liens, deed restrictions, easements, mineral rights, etc. Make sure you understand your rights. For example, property easements may benefit you or may hinder your use. Know who is responsible for repairs and how they relate to planned expansion. Some issues, which you may already be aware of, need to be discussed with the title company and/or seller and should be removed from the title insurance policy. Ninety-nine percent of the time you want to get an owner’s fee policy.
What should be surveyed?
The best survey is an American Land Title Association (ALTA) survey, which lets you know what you are buying. An ALTA survey shows property lines, exterior building lines, paving, curbing, catch basins, parking, fencing, utilities, landscaping, etc., as well as easements or encroachments. The title commitment only gives easements in hard-to-understand legal terms. On an ALTA you can actually see how they affect property. Other areas to study are parking, expandability and storm drainage.
How should building owners assess environmental factors?
When buying commercial property, even if everything appears clean, you should have an environmental Phase I study done. Phase I is a historical assessment and a physical walkthrough of the property by a certified environmental consultant.
If Phase I recommends further inspection, you move on to Phase II, which involves taking samples of soil, ground water, concrete, potential asbestos-containing materials or other suspicious environmental conditions. Phase III is the actual cleanup, which can be costly. Environmental factors are one of the biggest deal killers and lengtheners.
What's critical regarding the building?
The building inspection is essential, parts of which can may be taken into account earlier. The major issues are the condition and life expectancy of the roof system; the structural components of the building, especially walls and floor; and that the mechanicals — fire suppression sprinkler, HVAC, plumbing, electrical — are working and to code. These relate to the building’s integrity and can be expensive to fix.
What if there are many problems?
If problems or obstacles are discovered that have serious economic impact or use impact on the property, you should walk away from the deal or get the seller to renegotiate the purchase price.
Simon Caplan, SIOR, is a principal at CRESCO Real Estate. Reach him at (216) 525-1472 or firstname.lastname@example.org.
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