Time to Reduce Your Price?

Is your property easy to buy?

It’s no secret that Edmonton industrial real estate prices have softened.  If you look city-wide, at all building sizes, recent numbers suggest as much as a 20% drop in selling prices.  Not to worry, that isn’t the whole story. Depending on your specific neighborhood, building size and features, this is not likely an accurate number for your specific property – you may have weathered the storm in better shape than you think.

Does this mean you need to drop your price to sell? It might, especially if you need to sell faster than average. Consider yourself warned, but these days its not uncommon to see an industrial property sit on the market for sale or lease, for over a year.  If now is the time for you to sell, one of best way to preserve your equity in today’s market is to make it easy to buy.

As a seller, there is something you can learn from the strategies of big-box department stores luring consumers in with loud, almost-irresistible offers of ‘no payments till 2025!’  Making your property easier to buy is tackled through creative deal structuring – assuming that you’ve got all the bases in a smart marketing plan already covered.

Become a Deal Architect

The pool of buyers who qualify for today’s tight lending criteria is small – people or businesses with great credit, and large amounts of liquid cash for a down payment. Offering alternative buying solutions such as Seller Financing and Lease Options widens the pool of buyers who are capable of purchasing your property. Here’s a very brief run down of these two tools, we suggest you sit down with your Realtor® to discuss in depth.

Seller Financing: in essence, taking an IOU on a portion (or all) of the purchase price.  The number of ways to structure seller financing is limited only by your imagination. Offer interest-only payments, delayed payments, escalating payments, or yes, even ‘no payments till 2015!’  The larger the amount of financing you can provide, and the more flexible you can be on payment terms, the more attractive your deal is to buyers. Most buyers are willing to pay a premium for this opportunity.

Lease Options or Rent-to-Own: its possible to achieve a higher sale price as well as higher lease payments through lease options.  These deals appeal to the businesses that would love to buy, but either can’t come up with the large down payments the banks require, or just don’t want to because they want to keep their cash in their business. The entrepreneurial dream of owning your business’ property is still alive and well in Edmonton, and if a business owner can begin to build some equity in a rent-to-own deal, they will likely choose that before simply lining their landlord’s pockets with cash. It comes down to negotiating a non-refundable deposit, payment terms, and option expiry terms you both can live with.  A non-refundable deposit ensures the buyer/tenant will treat the property as their own, saving you the hassle that typically comes with land-lording.  There are also methods to increase the monthly payments, protect your sales price from future market drops, and further tie the buyer/tenant to the property as their equity increases through “down payment assistance options”.

It goes almost without saying – along with the rewards that these tools can bring there are risks, and we suggest buying lunch for your favorite lawyer & Realtor® to talk about your specific exposure.

If you are not in a position to make your property easier to buy, and you need to sell faster than the market is moving, you will need to take a hard look at pricing aggressively. Before you simply drop your price, talk with your Realtor® about creative ways to make your property easier to buy.

What’s your take? I’d love to hear your stories in the comment section.

EAVB_HZGENASJUR

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Is Your Environmental Good Enough? How to avoid losing sleep in real estate tip #17:

There is a good chance your lender (or the Purchaser’s if you are the Vendor) will only accept Environmental Site Assessments (ESA) from an environmental consultant that has previously been approved by them.  Not all environmental reports will meet your bank’s criteria. A criterion of one bank, for example, is $1M in liability coverage – whereas some reports are only covered for the amount of the fee charged for the report (typically $3000-5,000).

Save yourself a headache, and weeks of time in the event of a bank-rejected ESA, by stating in the purchase contract that the ESA MUST be performed by a party approved by the purchaser’s lender.

When it comes to addressing ESA’s in the contract include:

• The date of the report. (Some banks again, require them to be less than 1 year old, yours may be different yet.)
• Who is to bear the expense. (Even if it has already been paid for by the Vendor, don’t make any assumptions here. I have seen a Vendor send a bill to the Purchaser for the ESA after the deal was done!)
• When the report must be completed by. (Give yourself some breathing room before conditions come off, give your lender some time to review and approve the report.)
• Who is to perform the ESA. (Consult with your bank, and follow up with whomever is arranging the report to ensure the engineer is on the approved list.)

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On the way up, Risk increases every day

and on the way down it decreases every day.

These are the words of wisdom from Ozzie Jurock, a long-time real estate investor as he shares his take on how to make a move in the current down cycle.  This concept is especially hard to wrap your head around when you are watching price drops happen around you, you are reaching for your wallet to commit, and your neighbor is shaking his head at why you are “overpaying” for a property.

Real estate always has, always will, be cyclical in nature, and smart investors make their decision based on fundamentals, not the emotion of the neighbors, their city, or the media.  Here are a couple more bits from Ozzie, then I suggest you read the full article entitled, “Shop Wisely and Make Offers” here. 

Buy “use” to you or your family — buy your own business space … and don’t worry. The best deals come in down markets.

For 40 years, prices soared because we lived through the most unreported inflation of all times, because we printed more money than ever.  Today, this is even more the case. All that extra cash created out of thin air will continue to compete with the money you and I make and drive hard asset prices eventually higher again, after we clear out the messes and the excesses, just like we did in 1992 (or 2001, 1998, 1987, 1981, 1974).

From an investor’s perspective, we like cash-flowing properties anywhere — where there is a good employment base, low vacancies, capital investment and a good price-to-rent ratio.  We see that developing in Edmonton and many small towns throughout Alberta.

Another piece of Ozzie’s advice is to “overcome your fears and write offers.”  I can’t stress how important this is in the current market conditions.  So many vendor’s I have spoken with know they are priced high, but stress verbally they are negotiable.  They aren’t negotiable with a tire-kicker making a verbal offer – they need so see a signature and a deposit.  With more available product now is the time to shop hard by writing offers on multiple properties – leverage your opportunities against each other.  One thing you need to understand about most vendors is that they don’t have a store full of product to move off the shelves – often they only have one product.  Can you blame them for pricing in such a way “just in case” they can pull it off?  

Many vendors are on the verge of dropping their price, and all of a sudden your low-ball offer isn’t so low, its right in line with their new price.  Do you want to have the first crack at a lower price?  Or wait until the new more attractive price is advertised in the newspaper for all your competitors to see and jump on?  An offer with a signature, deposit, a well-written cover letter featuring a price backed with new comparables will take you places you never expected.

I have to throw in one more Ozzie quote – forgive me for the blatant self-promotion but sometimes its just too easy:

The key is that you shop wisely, get a professional realtor, research, overcome your fear and make offers.

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2.5 Easy Ways to an Unhappy Lease

1.  Don’t Get it in Writing.

Residential leases (in Alberta) are governed Alberta Residential Tenancies Act, and the Act will trump any disparity between the lease agreement and the act.  But there is no such animal for commercial leases; the terms of the lease will prevail.  In a commercial lease agreement, what’s “normal” holds water like a sieve, and there is no such thing as a “standard lease”.  For example, it is common for structural repairs to the foundation, exterior walls, and roof to be the responsibility of the landlord, but if the lease agreement states otherwise, it’s not likely you will be able to argue your way out of the bill.  You can see a similar case study in action over at the Law of the Land blog; except in this example, when the Landlord issued a $32,000 roof repair bill to the tenant, the tenant was protected by a term in the lease agreement stating this type of repair to be a Landlord’s responsibility.  If that clause had not been there, the results would be different.

It’s a cliché that can stand repeating, a verbal agreement is as valuable as the paper its written on.  The Landlord may very well have promised you that the property would be cleaned out by the middle of the month during the verbal negotiations, but if you don’t have it on record, it is going to be tough to claim damages for the month you were not able to profit from your new space due to the previous tenant’s equipment being in the way.  You don’t need to have an evil Landlord for seemingly small issues to become hot buttons – expensive buttons; all you need is a “too busy” Landlord.

2.  Don’t Verify the Claims.

“There’s 15,500 square feet available here . . .”
“There is “abundant” heat provided by the “newer” HVAC  . . .
“With the new ventilation system coming in there won’t be any fumes from the neighboring tenants . . .”
“Plenty of power here . . .”
“600 amp electrical service throughout the building . . .”

Its not likely you are an expert in all of the construction trades required to make a building function, so expect to use third party expertise for verification . . . and expect to pay for it.  If you need 600 amp electrical service to make your widgets, hire an electrician to verify it.  The Landlord isn’t necessarily trying to mislead you by telling you its 600 amp service, it may just be what he/she was told when it was purchased, and there wasn’t a need to verify it at the time.  A building inspector is not just a good idea when purchasing a property, set aside a few hundred dollars of your moving budget to get things right the first time in your leased space.

2.5. Don’t Be A Team Player

I’m aware this is self-serving advice – but its still good.  Unless you are well versed in your local real estate market, and have a background in contract law, you are wise to utilize a commercial leasing agent and a lawyer in addition to your building inspector.  A commercial leasing agent can make sure you are not overpaying for your space (or undervaluing your property if you are a Landlord), and help you determine a rent-free period and other tenant inducements that are in-line with the market.  Fortunately if you are a tenant, representation by a commercial leasing agent is usually paid for by the Landlord, and the agent can also take much of the legwork out of finding appropriate space for your business.  Your lawyer will likewise ensure that the lease agreement adequately represents all parties involved, the cost for this is usually determined by the length of the lease agreement, typically $300-500 well spent.

Disclaimer: I am a real estate associate licensed in the province of Alberta, not a lawyer, and this white paper is not intended to provide legal advice.  Please consult with your lawyer for counsel specific to your situation.

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Negotiating the Personal Guarantee – Yes You Can!

When the Landlord delivers a Personal Guarantee to be signed, a common response is a free autograph from the Tenant.  What you need to know is that as a Tenant, your autograph may be worth more than that.  Like any other aspect of a contract, the terms of a Personal Guarantee are limited only by your creativity . . . and market conditions.

What it is: Put simply, a personal guarantee is “a promise made by an entrepreneur which obligates him/her to personally repay debts his/her corporation defaults on.”  Here in Alberta, compliance with the Guarantees Acknowledgement Act is required.  This act is generally in place to protect the ordinary citizen from unknowingly getting into a world of hurt, the extent of which he/she did not properly appreciate when he entered into the undertaking in question, and means you will need to appear before a Notary Public, which is covered below.

The Purpose: In a lease transaction, the landlord may require it to secure rent payments, or repayment of a loan made to the tenant, or possibly to make the tenant responsible for any significant improvements the landlord is paying for.  If the tenants’ business goes under, the guarantors will still be personally responsible for the amount guaranteed.

Is it Mandatory?  Not always.  There are two major factors that increase the bargaining power of the tenant in avoiding the guarantee; covenant, and market conditions.  

Covenant is the perceived financial strength and ability of the tenant to pay the rent (Mark Blayney, “Selling Your Business for All It’s Worth”).  During the negotiation process the tenant can demonstrate strong covenant through past and current business success, reputation, a strong business plan, and of course, cash in the bank doesn’t hurt.  A landlord may remove the requirement for a guarantee, or at least limit it, for a tenant with strong covenant.

If market conditions heavily favor the tenant, like everything else, the tenant will have more leverage in having a guarantee requirement removed or limited.  The market must be fairly unbalanced for this to occur – the landlord will need substantial motivation before waiving certain guarantees.  At the time of writing this, Edmonton’s industrial market is fairly balanced, and most negotiation will be focused around the covenant of the tenant.

Is it a Good Idea?  Like all negotiations, all sides must be taken into consideration – do not overlook the need to build rapport, and the value of a long-term business relationship.  If you are a landlord, I would generally advise you to require one for: rent payments from tenants with weak covenant, substantial improvements made to the tenant’s space, and absolutely for any loans made to the tenant.  I would similarly advise some leniency when dealing with strong tenants, or weak market conditions.

If you are a tenant, it is worth negotiating a reduction in your liability.  However, if you are a tenant with weak covenant, and the market conditions are not on your side, your willingness to provide a personal guarantee can strengthen your case and demonstrate faith in your cause.

What you can negotiate: Aside from negotiating the existence of the guarantee, there are no limit to the number of ways you can limit the guarantee – an open mind and some creativity will go a long way.  Here are a few common methods.

1. Cap the amount.  There is no rule stating that the amount guaranteed must be equal to the value which is being risked by the landlord.
2. Depreciate the amount.   Have the amount guaranteed reduced over time – especially if the guarantee pertains to a loan that is being repaid over time (the landlord will not always volunteer this option).  IE: if the guarantee is for a loan amount that is being repaid over 5 years, have the guarantee reduced by a fifth on each anniversary.  If the guarantee is directly related to the weak covenant of the tenant, have the amount reduced as the tenant is able to prove its ability to pay the rent.
3. Joint & Several Liability.  If there are multiple partners involved in the business, the landlord may require joint and several liability – which means the landlord can chase after any partner for the full amount.  You can attempt to have your personal liability reduced to your percentage of the partnership, or another compromise is to propose liability for 150% of your pro-rata share.  IE: if there are three partners, each partner is liable for about 48% (150% X 33%) (Jonathan A. Goodman, “Limited Guarantees”).

Notarizing the Guarantee: As previously mentioned, in the province of Alberta all personal guarantees must be evidenced by a Notary Public, and the Notary Public must verify that you understand what you are getting into.  In Alberta, lawyers, students-at-law, judges, members of the House of Commons, members of the Legislative Assembly, and members of the Senate who were residents of Alberta at the time of their appointments are automatically Notaries Public.  

There is a fee to have your document notarized, at the time of writing, a $100.00 fee is common in the Edmonton area.  If you have a lawyer on your team with whom you have a good relationship – perhaps they will offer you a stamp in exchange for lunch.  If you are using a real estate associate to handle your transaction, they may have bought enough lunches for lawyers to get the odd free stamp as well . . .

Disclaimer: I am a real estate associate licensed in the province of Alberta, not a lawyer, and this white paper is not intended to provide legal advice.  Please consult with your lawyer for counsel specific to your situation.

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Rose Colored Glasses & Property Valuation

 I came across this interesting experiment while listening to “Difficult Conversations: How to Discuss What Matters Most” by a few authors associated with Harvard Law School and the Harvard Negotiation Project.

Howard Raiffa, the Frank P. Ramsey Professor (Emeritus) of Managerial Economics at Harvard Business School posed this assignment to 3 teams: determine an objective value for a business based on a fact sheet.  One team was informed they would be selling the business, another team informed they would be purchasing it, and the final team informed they were providing an independent appraisal.  All teams were given the same fact sheet about the business, all directed to provide an objective price (not a list price, or purchase price). 

The results?

The team selling the business valued it 30% higher than the independent appraisal team, and the purchasing team valued it 30% less than the independent team.

Different values aren’t surprising, what I found surprising was how far the spread was – considering they were only role playing and theoretically not emotionally involved in the success of the transaction!

Which lenses are you wearing?  Your chances of arriving at an agreement improve drastically when you can put on the lenses of the other party.  However, this doesn’t mean you must keep those glasses on . . . 

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Rule 59 & Old World Negotiation

As an agent I owe fiduciary duties to my client, to advance and defend their best interest in the transaction.  This usually translates into getting them the “best price”.  If  I find myself in dual agency, representing the seller and the buyer (or landlord and tenant) I ostensibly end up with a conflict of interest.  I cannot get both parties the best price.

The hotly debated Rule 59, in an attempt to resolve this conflict limits my role in the transaction.

Rule 59 dictates that the REALTOR® must only perform facilitation services. They cannot provide any advice or counsel to either client, and must act as a scribe in the preparation of real estate contracts. This means the client is responsible for inserting protective clauses and conditions in their contracts. 

This is a solution to a problem that does not exist.  The best interest of my client includes the interests of the other party to the transaction.  This is the foundation of a win-win agreement, and it can only be found when both parties understand each other’s interests, and attempt to meet them.  There is not a conflict of interest – both parties are interested in reaching an agreement.  

Given, some are not interested in a win-win solution; but even in a win-lose agreement something is still lost.  The relationship.  The value of the relationship I will leave with you to determine.

There are many other interests involved in a transaction besides price, and price is often the most simple; defined by the market.  The other interests can be brought out into the open through deep-listening skills, one of the attributes in my job description as your negotiator.

By limiting my role, Rule 59 also attempts to limit my opportunities to be unethical.  But I assure you, I still have plenty of opportunities to be unethical even in single agency . . . when choosing an agent choose well!

-Jeff

 

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