Frequently Asked Questions

GENERAL QUESTIONS

A commercial real estate agent is a specialized professional who has been trained to assist clients in selling, buying and leasing for commercial transactions.

Residential purchases deal with basic inspections which can typically be completed in one day. Residential purchases are also cheaper and can usually be closed within 30-45 days. Commercial property purchases involve property that is being used for business purposes, so there is more liability in the property and the land connected to it. The inspection process is extremely extensive, depending on prior usage, so the feasibility period is much longer and closing on commercial real estate deals can be a very long process.

A gross lease means the monthly rent payment includes everything; rent, utilities, real estate taxes, insurance, maintenance, etc. The term net lease has different variations, from net to absolute net. With a net lease the tenant pays, in addition to rent, a portion of the operating expenses of the building, typically the real estate taxes. With a double net lease the tenant pays both the taxes and insurance on the building. A triple net lease has the tenant paying all of the operating expenses of the building. An absolute net lease has the tenant paying all operating expenses, including structural maintenance and replacement. This type of lease is reserved for long term credit tenants.

Commercial real estate cap rate (short for capitalization rate), is the rate of return of an investment in commercial real estate, based on the amount of income it is expected to generate. This statistic is generated to help an investor determine the potential return on their investment in the property.

The commercial real estate cap rate of a property can be determined by taking the net operating income and dividing it by the current market value of the property. The net operating income can be determined by looking at the annual return on the property after subtracting any operating costs of the property.

A letter of intent is a document that has been written up to declare the intentions of the writer. From a commercial real estate point of view, the letter of intent describes what the terms of the real estate transaction are. The letter of intent is used to allow two parties (the property seller and the property buyer) to agree on all terms of the proposed deal.

Generally speaking, an agent is needed to allow potential buyers access to view a property. While it’s not a strict requirement for a buyer to view properties, they may not be able to get the same levels of access to the property without them.

A buyer could choose to view properties online, which does not require an agent. There may be difficulty in finding some of the properties online, however as a large portion of commercial properties are exclusive or confidential.

The first thing is to decide if moving into a new space is the right choice. Ask the following questions:

  • Is it a good time to move?
  • How important is location?
  • How much space do we need?
  • How much can we afford?
  • On what date do we need to move into a new space?
  • How will the new space benefit the company and its future?
  • What does it cost to move?
  • Can we afford to lose business or employees during the transaction?

You should expect your agent to think only of your interest and to give you advice. The agent helps you determine how much space you need, what is your most important selection criteria, and then find and negotiate the space that best fits your needs. When it comes to the negotiation, make sure your agent representative knows what is important to you.

Generally, it’s a multiple of the net discretionary income. A highly desirable business with a long track record of profitability will warrant a higher multiple and value. The challenge is determining net discretionary income. That process involves reconstructing the profit and loss statements of the most recent 3 year period to determine how much net income the business is actually generating. Once that number is calculated, an appropriate multiplier is applied. A miscalculation of net discretionary income or a misapplication of the multiplier can have a significant effect on the value. Valuing a business is not an exact science, but an experienced business broker can help you with this process.

When you lease a building, the tenant has the right to occupy the building during the term of the lease. When you sell the building, the new buyer buys the building subject to the rights of that tenant under the lease. You can create value by virtue of the rent paid, or you can decrease value. Many owners make a big mistake by leasing space to marginal tenants that pay marginal rent. That reduces the value of the building when the owner decides to sell. If selling is in your plans, be sure to discuss any potential lease situation with a knowledgeable commercial broker.

When a buyer inquires about a particular business we have for sale, we require them to sign a Non Disclosure Agreement (NDA). The NDA specifically prohibits a potential buyer from disclosing the identity of the business and financial information. In most cases, it is critical to maintain confidentiality. The seller needs assurances from the buyer that they will not disclose certain information to outside parties that could adversely affect the seller’s business. There are legal consequences if the agreement is violated. We also conduct a short interview to determine if the potential buyer is qualified to buy the business. For obvious reasons, financial information is made available only to qualified and serious buyers and not to the general public.

The MLS is a proven marketing tool for residential real estate. Nationally, the majority of homes are sold through the cooperative efforts of MLS members. In marketing commercial real estate, however, the focus is geared to a more targeted buyer and a national network. There is a much smaller pool of buyers for a commercial property and much more effort is required to attract a commercial real estate buyer. An exclusive commercial real estate company with national exposure, like our company, offers that type of service. Buyers of commercial real estate search web sites exclusive to commercial real estate and typically not ones where the primary focus is on residential properties.

These are all of the NNN (referred to as Triple Net) charges such as, taxes, insurance, and common area maintenance.


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