Selling Commercial Real Estate: Eliminate Surprises & Expedite Timelines
You’ve made the decision to sell your commercial real estate. Reasons vary from seller to seller but generally involve a change or transition – change in the market, the sale of a business, business outgrows the facility, a loan is coming due, succession planning, dispute between owners, or preference for a different investment.
Whatever your reason may be, selling your real estate can turn into a terribly long, costly and stressful process if it’s not done the right way. As a seller, once you open escrow there are certain things out of your control; however, there are a few things you can do before listing your property that will help eliminate surprises and delays throughout escrow. I recommend you do these six things:
- Title Search: A title company such as First American or Fidelity will typically open a free title order or “prelim” in hopes of securing the title business upon sale. The prelim contains exceptions and/or conditions that must be met prior to an ownership change. Easements, loans, tax liens, mechanics liens, leases, and the nature of the ownership—LLC, individuals, family trust, etc. are all detailed. You are interested in understanding any issue that could prevent or delay a sale such as a suspended LLC or an unsatisfied tax lien.
- Building Inspection: Any prudent buyer is going to insist on inspecting the condition of the building and will often use this as a means of renegotiating price during escrow. Common items include condition of the roof, remaining life of the HVAC units, un-permitted improvements, or parking lot paving. A seller should get their own inspection done prior to listing the property so they are aware of potential issues and inform buyers before opening escrow to minimize the possibility of re-trades.
- Environmental Survey: If your buyer borrowers money, most lenders will require a Phase 1 environmental assessment as part of standard loan processing. Why should you invest the money? Simply put—to know with certainty your property is clean and will pass lender scrutiny. You may also save a bit of time during the contingency period if the lender can “rely” on your report and avoid duplication.
- Evaluate Loans: Did you use a loan to acquire the property and subsequently pay off the loan balance? If so, it should not appear on the title report. Typically, if it does show, this means the satisfied loan was not re-conveyed properly. On the other hand, if the loans on title are still active, carefully evaluate any pre-payment penalties or yield maintenance clauses.
- Due Diligence Items: Compile and organize all due diligence materials. This includes maintenance contracts such as HVAC & roof, tenant leases, copies of permits & licenses, property information sheet, association documents, and old reports such as building inspection and phase 1 environmental. It’s also a good idea to walk the property with your broker and confirm which personal property stays & goes.
- Tax Consequences: The time to understand the tax implications of a sale is before placing the building on the market. There are several tax agencies with their hands outstretched waiting for their cut. These include the IRS – capital gains and depreciation recapture, the Franchise Tax Board, and the Affordable Care Act. Everyone’s situation is different and there are ways to defer your tax bill. It is imperative that you consult with your CPA [and any other trusted advisors you work with] so you understand all your options and obligations.
Are you considering selling your commercial property? Contact me directly at (949) 263-5303 for a free evaluation and to better understand all your options.