You have just found a commercial property to use for operating your business, and are now ready to start the purchase negotiations. Unfortunately, negotiating the purchase of a commercial property can be a tricky business. There is simply too much to consider, including whether the asset has tenancy in place and the leasing terms, whether the yield is commensurate with the wider market, how much to pay, and much more. For most potential buyers, all these considerations are a major cause of anxiety. But for savvy buyers of commercial real estate in Toronto, these are simply a chance to negotiate a better purchase deal.
Here are some things that need to be considered when handling tricky commercial property purchase negotiations. With these, you certainly can be able to achieve more favorable purchase terms and which might include a lower price:
Start by finding out about the condition of the fit-outs on the property. Is the property in need of a new fit-out, or is it in a poor condition? If so, is there a provision in the sale or lease agreement for this? It is important to include terms in regard to new fit-outs for a commercial property every few years so as to make sure that the asset is well maintained, and is up to a quality standard. If the property you are about to purchase looks dated, then make sure to review the sale or lease documentation in order to determine whether fit-outs are included in the purchase terms, and whether it has been enforced. Apart from this, ensure to investigate whether the tenants have contributed any funds to the fit-out, in which case, part-ownership has to be registered in the purchase or leasing documentation.
Make sure to find out any extra costs associated with the maintenance and running of the property as a result of the previous owner or tenants as these all can impact your returns and even ownership in the future. For example, are there site contamination issues that might need environmentally conscious treatment at a significant expense to you? It is recommended that you consider all these issues and their subsequent costs and negotiate the cost of their treatment in the final purchasing agreement, or have the owner remove them before reaching a purchase agreement.
Consider whether the current rent is commensurate with the market rate. It is something of a paramount importance to set a fair and reasonable rent that reflects the current situation, fit-out and size of the property as well as the geographical area. If the rents are out of step, does the lease agreement allow for a rental review? Or is the lease nearing completion so as to allow for an adjustment?
In some cases, the current tenants might be paying higher than the standard rents so as to repay a fit-out that was funded by property owner. In such a case, you will need to consider the results of the tenant terminating the lease agreement, or not renewing the lease. Does the current lease protect you by stipulating that the tenant must reimburse you for the expense? A higher than normal rent might indicate that further investigation is required so as to make sure you are not met with surprises after the settlement as this may impact negatively on the commercial property’s viability.
Before signing the final purchase agreement, make sure that you have thoroughly analyzed the leasing documentation. This way, you can be able to determine whether there are outstanding or pending lease renewals. Apart from this, make a point of reviewing the payment history of the tenants and whether there are payments in arrears. If so, this could be a clear indicator of poor management, or even poor tenant quality. This all might create difficulties for you when you finally take ownership of the commercial property. It is recommended that you negotiate with the current owner to try and settle any outstanding debts. If not possible, then have all outstanding debts taken into account in the purchase price.
Prior to giving a commercial property for sale a consideration, it is recommended that you perform an independent research on its historical performance. While at it, make sure to do a comparison of similar commercial assets in the area so as to get a clearer picture. Look at the property’s performance over a number of years and assess its capital growth performance and yield. Any discrepancies might give you room to negotiate for a better purchase deal.
Which commercial property is right for you?
This is one of the first questions you should ask before purchasing a commercial property. The right answer to this question is dependent on your objectives. Remember that some commercial properties offer noteworthy depreciation chances on equipment and plant, which most property owners utilize to offset taxable income. Note that some properties offer significant returns and thus are bought on the basis of rental income.
All in all, once you have understood your investment needs when it comes to commercial property purchases, it then becomes much easier to take a strategic approach to the negotiations.