Business, Profits and Strategy

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

In Part One of this article we discussed the difference between a Buyer-Occupant and an Investor-Buyer.

So, what are the precise factors that would cause a Buyer-Occupant to value a property differently than an Investor-Buyer? The Buyer-Occupant would basically buy the property, make improvements that would support its business needs, move its operations in, and get to work. The Investor-Buyer must deal with a host of other issues, such as: vacancies; the impact of operating costs and property taxes on achievable rental prices; advertising & marketing; rental concessions and discounts; interior improvements; professional fees; leasing and sales commissions; government approvals, permits, and fees; competition; and more.

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

Comparison of Factors that Affect Price

Buyer-Occupant	Investor-Buyer
Moving costs Improvements Furniture, fixtures & equipment Operational demands Employee recruiting and retention Image Proximity to customers, suppliers, partners, & competitors Other	Capital improvements Vacancies and downtime Operating costs and property taxes Advertising & marketing Rental Concessions and Discounts Interior tenant improvements Professional fees Leasing or sales commissions Government approvals, permits, and fees Cash reserves Return on investment Other

As you can see, in order to generate an acceptable return on investment, the Investor-Buyer will typically incur a longer list of significantly greater costs when purchasing a property, in comparison to those incurred by a Buyer-Occupant competing for the same property. Keep in mind too that one Investor-Buyer may project a property's costs, risks, and required return on investment differently than would other investors, which may result in a different value, as well.

Assuming that the Buyer-Occupant is willing to negotiate a purchase price based on the property's fair market value, it is reasonable to assume that the Investor-Buyer will need to purchase the property at a discount against the price the Buyer-Occupant would likely pay. That discount must be sufficiently large enough to provide for the Investor-Buyer's costs, risks, and ROI expectations. Well, that makes sense, doesn't it?

So, then why not just sell the property to the guy with the biggest check? Because timing and price may both be important to your company!

Timing Can Be Everything!

So, why the huge time difference between when Broker A thought he'd likely secure a Buyer-Occupant and when Broker B expected to secure an Investor-Buyer? In the current economy, many markets are flush with investors of all types seeking to acquire real estate that will generate reasonable returns. Upon completion of their due diligence, most investors want to put their money to work right away. So, the time required to complete a transaction with an Investor-Buyer should be much shorter than that required with a Buyer-Occupant. On the other hand, Buyer-Occupants must find properties that support their companies’ specific functional and operational requirements. Therefore, depending on the uniqueness of your company's property relative to current buyer demand, it may take longer to secure the right Buyer-Occupant and complete a transaction.

Keep in mind that the methodologies behind this article are based on typical commercial real estate market trends. The demand profiles of Buyer-Occupants and/or Investor-Buyers may change, which could have a reversing effect on the above. In such instances, it is possible that Investor-Buyers would be less interested in a particular property and Buyer-Occupants could move quicker. Pricing could invert for various reasons, too. Few markets remain the same forever, and within certain markets, particular properties could follow the norm or perform contrary to typical supply and demand profiles. Interestingly, in some geographic markets Investor-Buyers have so aggressively competed for certain property types that they have bid up the value of those properties, resulting in their having minimized the spread between prices they would ordinarily pay and those that Buyer-Occupants would pay.

After all is said and done, you must ask yourself if the additional costs and risks associated with carrying your company’s property for the longer time period that might be necessary to secure a Buyer-Occupant will be worth the additional price you might achieve. On the other hand, will the lower price for which you’d likely have to sell your property to an Investor-Buyer be worth the reduction in risk and price? Decisions, decisions, decisions!

No matter what your company may seek to achieve, and irrespective of the particular attributes of your company’s property, it will be essential to understand the current and potential future dynamics of your local market, including the competitive landscape, supply and demand, and buyer profiles. Determining whether your property is more suited for a Buyer-Occupant or an Investor-Buyer, whether supply, demand, and pricing are in your favor in your local market, and whether your company is willing to wait or must close a deal soon will be important to the ultimate success of your real estate disposition project. Once you’ve completed your research and drawn the necessary conclusions, only then should you decide whether your company wants to sell its property quickly or for the highest price!

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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