Business, Profits and Strategy

Why Your Property May Have At Least Two Separate Values
Part One of a Two Part Article

Your company has decided that it's time to sell the real estate it occupies. The property has served your company well, permitting the company to grow and prosper. But, now it's time to move on to another location, to larger or more efficient quarters, or to a different type of facility that will better support your company's operational requirements.

Or, maybe your company simply no longer wishes to own and manage its real estate. Perhaps your company is now interested in capturing the equity it has built up since it acquired the property and relocating to another property. Perhaps your company has elected to convert from private to publicly-held status and wants to avoid the negative accounting implications associated with real estate ownership, or it wishes to redirect the value contained in its real estate into more productive areas of the company's growth. A number of reasons could drive such a decision. Nonetheless, it is time to sell!

Andrew B. Zezas, SIOR
Relationship Manager,
Strategist, President & CEO
(908) 245-5999 x11
andrew.zezas@realstrat.com

What to Do?

So, what do you do first? Hire a broker? Place a "For Sale" sign on the property? Call other companies like yours? You could do all of the above. But, before offering anything for sale, it is advisable to gain a solid understanding of its worth relative to the demands of buyers and the competitive market.

So, you call-in a couple of commercial real estate brokers to see what they can tell you about the market and your property. Then, you make certain that they are all sufficiently qualified and specifically experienced in disposing of properties that are similar to yours in your local area. They advise you to make some minor repairs and improvements to the property prior to offering it for sale, such as adding a fresh coat of paint, fixing a broken curb, and adding some new landscaping,...all of which is simple and cost-effective to complete, and will enhance the sale-ability of your property.

Then, each broker offers you his and her opinion of the time it will take to sell your property and the price you'll likely derive. That's when you begin to scratch your head.

Broker A informs you that you'll likely achieve $30,000,000 for your property, and that it could take up to a year to secure the right buyer at that price. He does not recommend a fire sale or discounted price offering, as demand for properties similar to yours is strong.
Broker B suggests that your property would sell in three to four months, but would yield a sale price of only $23,000,000. She then says that buyers will line-up outside your office door with checks in hand

Here's the head scratching part!

You ask yourself if Broker B is setting you up for a low ball transaction. If not, then you might ask why the timing and prices proposed by the two real estate professionals are so far apart from each other. You will probably ask yourself, "Why can't we sell our property quickly AND achieve the highest price?"

By probing deeper you realize that although you've spoken with two very experienced and reputable commercial real estate brokers, they each viewed your property from the perspective of a different kind of buyer. Yes, you read that right! Two different types of buyers, standing next to each other on the same day viewing the same property, with access to the same information, may very well derive greatly different values for the same property. This concept has very little to do with one buyer simply being a bottom-feeder and the other being more reasonable. While that certainly could happen, that's too easy and is not part of this story.

Real Estate’s Utility

You see, real estate only has value if it has utility. If a buyer acquires real estate to house its company's operations, then the utility of that real estate is found in its ability to support the functional requirements of the company that will occupy it. The buyer, in this case, would be considered a "Buyer-Occupant". If, on the other hand, a buyer acquires real estate for investment purposes only and would not plan to occupy it, then that buyer would be considered an "Investor-Buyer". In that case, the utility of the real estate would be found in the financial return that the investor would achieve. Because of their ultimate objectives, the Investor-Buyer and the Buyer-Occupant would place very different values on the same property.

The Buyer-Occupant will consider the physical aspects of the property, such as whether the property has enough space to accommodate operational requirements, whether that space is shaped properly, whether it offers sufficient windows, power, HVAC, loading, ceiling height, column spacing, parking, image, and so on. These are all issues that will affect the Buyer-Occupant's ability to operate his or her business successfully within that space. The Buyer-Occupant will also consider whether the cost to purchase and operate the property will support his or her company’s financial and operational objectives.

The Investor-Buyer, on the other hand, will consider the ability of the property to attract and retain tenants and to generate an acceptable return on investment that is commensurate with the costs and risks associated with such an investment, in comparison to alternative investments.

Yes, Buyer-Occupants and Investor-Buyers will derive very different benefits from the same property and therefore, would likely ascribe very different values to it.

Next month, in Part Two of this article, we’ll explore the precise factors that would cause a Buyer-Occupant to value a property differently than an Investor-Buyer.

Andrew B. Zezas, SIOR, is Relationship Manager, Strategist, and President & CEO of Real Estate Strategies Corporation, Publisher of "Business, Profits and Strategy", a monthly online publication read by thousands of business, financial, and real estate executives nationally, and, is the author of two new real estate books, The CFO's Guide to Understanding Corporate Real Estate Transactions and The CFO's Guide to Hiring the "Right" Real Estate Service Provider, both of which will are available at www.TheCFOsGuide.com.

Mr. Zezas is well-known for his ease and informative style of public speaking, and has given informal talks, formal presentations, and has lead training and educational programs for business, professional, government, and trade associations, throughout the US and Canada, including the American Management Association (AMA), the U.S. Postal Service, RealComm, Building Owners and Managers Association (BOMA), Society of Industrial and Office Realtors (SIOR), and others. Andrew is founder and National Chairman of the SIOR Tenant Representation Specialty Practice Board, a group of over 300 tenant representation focused commercial real estate professionals from around the world. He is a licensed real estate broker in New Jersey, New York, Connecticut, Pennsylvania, and Florida, and is a licensed real estate instructor in Texas and Indiana. He can be reached at 908 245 5999 or via email.

Real Estate Strategies Corporation, located in Kenilworth, New Jersey, and serving its clients throughout the country, helps companies create and execute Business DRIVEN Real Estate Solutions...and Opportunities, faster and with less risk. Visit www.RealStrat.com.

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