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Caveat Emptor (Buyer Beware)

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Simon Terry-Lloyd

Working at the world's largest pure tenant representation firm is a great opportunity to interact with business owners and managers representing a broad range of industries. It gives us a lot of joy to help increase the EBITDA value of the companies we represent. In addition to providing leasing services across the country, we spend a great deal of time working with business owners interested in buying their real estate instead of leasing.

The purchasing of real estate is an entirely different process to a leasehold interest and there are certain considerations that buyers should be aware of before committing to the process. The first relates to their investment portfolio: Do you want to diversify your investments to include illiquid assets? Real estate is a physical investment and if you need to get your money back in a hurry, you will pay dearly. The counterpoint to this is something a very successful real estate investor once told me: “If you want to be a hero in commercial real estate, just be patient and wait.” The bottom line is, over time, real property will appreciate through inflation and increased rents.

The second consideration is what sort of debt, if any, the buyer needs to secure in order to purchase. Cash is king and will always get a sellers attention because it's one less contingency standing in the way of closing escrow, but it doesn't have the same cachet it had a few years ago. There is simply less desperation in the market. Therefore many of the owner-user buyers we represent are taking advantage of incredible interest rates offered through the Small Business Administration (SBA). This provides companies of various sizes with unbelievable debt with as little as ten percent down. One of the best uses of real estate from an investment perspective is the leveraged return that a ninety percent Loan to Value (LTV) creates in the SBA program. For example, if you pay cash for a $1,000,000 building and sell it for $1,100,000 a year later, you have made a ten percent ($100,000) return. On the other hand, if you buy the same $1,000,000 building using a ten percent deposit ($100,000), when you sell it a year later for $1,100,000 profiting $100,000, you have made a 100% return. I can't stress how good this opportunity is for owner-users. The sooner you engage your bank or mortgage broker in the process, the better off you will be when it comes time to act.

Understanding your medium term growth and space requirements for your business is the third consideration. Although the investment may be sound, it would be a wasted opportunity to buy the wrong size building for your company. The economy seems stable-to-improving right now and general confidence is the best I have seen in recent memory. Business owners and managers are finally able to predict their growth prospects with a decent level of confidence. Nonetheless, buying a building provides less flexibility than leasing where you can expand, relocate or sublease should things change. Recognizing the need for flexibility, the SBA allows an owner-user to occupy 51% of their building while leasing out the remainder.

The final consideration is the buyer's ability to deal with repairs and maintenance. Understandably, some of our clients are not interested in taking a “landlord” role in managing their business operations. However, I don't believe it's as demanding as it seems. If it were, there would be more locally-based landlords to oversee ongoing maintenance issues. Mechanical systems, plumbing and electrical systems are all subject to failure at some point in time. A qualified building inspection during due diligence will help to highlight potential problems in the near term but over time systems degrade and break down. Establishing maintenance contracts will help to avoid unnecessary and costly repairs.

With any major investment, it's important to proceed with your eyes wide open. Buying commercial real estate is a big decision and it's important to select a broker who is experienced in representing buyers and can add value throughout the process. This will help to ensure this is the best thing for you personally and your business.

About Simon

Simon Terry-Lloyd, Vice President at Cresa San Diego, represents tenants and owner-user buyers throughout San Diego County and across the country. His experience gives clients invaluable insight for sight selection, price negotiations, industry trends and redevelopment. Simon is an MBA, LEED AP and graduated from the Real Estate Management Program at Harvard Business School. About Cresa As the world's largest corporate real estate advisory firm exclusively representing tenants, Cresa specializes in the delivery of fully integrated real estate services, including: Transaction Management, Project Management, Strategic Services, Corporate Solutions, Site Selection, Lease Administration, Capital Markets, Mission Critical Solutions, Relocation Management, and Facilities Management. For more information, visit www.cresa.com.

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