Contributing Author: William F. “Felton” McLaughlin, CCIM, SIOR
When it comes time to sell a commercial property that sits in a challenged location, the first course of action for a seller and/or the listing broker should not be to wonder about the size of the discount that should be placed on the valuation of the property. Rather, focus your efforts on all characteristics of the property that are either unique or offer some sort of competitive advantage. If you can identify how these unique features benefit the user, you can market the challenging property more effectively.
As the recent sale of a veterinary medical office building will show, we discovered some unique property attributes that helped the seller achieve a sale price close to the asking price.
- Zoning– How restrictive or permissive is the zoning for that property? In the case of this veterinary practice, the zoning had changed since it first opened, and it was considered a non-conforming continuing use. As a grand-fathered use in a neighborhood that no longer allowed the use, this meant there would never be another competitor setting up shop nearby – effectively granting the veterinary practice in that location a monopoly.
- Use– Does the use itself have any attractive qualities? In the case of veterinary practices, the business itself is in a major upswing due to the “humanization of pets” trend. With pets increasingly being treated as family members, the dollars spent caring for pets has exploded in recent years. In fact, the business has become so attractive that many mom-and-pop solo vet practices are being acquired by larger corporate owners, which was the case with this one.
- Vacant or Occupied– Occupied properties with leases in place always command a higher price than vacant properties. If occupied and on a lease, what are the lease terms? And who is the guarantor? In the case of this veterinary practice, it had been in that location for 30 years, but only had 3 years remaining on the renewal term. While the length of the remaining lease term was a negative, there was a strong national guarantor. With the security of the income stream, that led to the natural question and to quote classic punk-rock band The Clash: Will they stay, or will they go?
- If Occupied– Occupied properties will be generating rent, but all investors considering an investment with that income stream will want to know if they can count on that income stream. All lease terms have expiration dates, and many have renewal options that are the tenant’s option to renew, not the landlords. Whether the tenant stays or goes will depend on many factors:
- Is the rent above-market or below-market?
- What rent will the tenant pay if they move to another location?
- Will the tenant enjoy the same level of business in another location?
- If the level of business remains the same, will the new cost structure of the new location allow the tenant to enjoy the same level of profitability it currently enjoys?
- Is there anything unique to the use of the existing facility that creates an advantage or disadvantage?
In the case of the veterinary practice, the rent being paid in the challenged location was 50% less than what a comparable rent would have been in a better location – so the practice enjoyed a much lower overhead while facing little competition nearby. There was also something unique about their use of the existing facility – the basement (for which the practice was not being charged rent) was used for boarding pets overnight.
In another location, the practice would have had to pay rent on a larger footprint – in addition to paying a higher rent/SF. The above factors made it unlikely the tenant would vacate the property.
- If Unoccupied– Unoccupied properties offer the opportunity to fill a need not currently being met by other businesses nearby. Listing brokers can generate gap analysis reports showing what the overall demand for a wide range of uses is within any distance deemed relevant to a location. The report will then show the annual amount of consumer expenditures within that sub-market and subtract the amount of dollars already being spent. The resulting “gap” between supply and demand will demonstrate graphically what uses should be targeted for the vacant commercial property.
- Condition of Property– Is it well-maintained, showing deferred maintenance, or in poor condition? Poorly maintained properties present the toughest challenge to sell because the buyer is inheriting all the issues the seller neglected to address. That said, if the property’s poor condition is due to extended vacancy, the property may be a candidate for adaptive re-use.
Development properties always represent opportunity to the right audience. In the case of the veterinary practice, the practice had been in that location for 30 years and the building was in good condition. In addition, there was specialized equipment in place like X-ray machines and other medical equipment, much of which required specialized build-out that was expensive to install (lead-lined walls for the X-ray room and plumbing in all exam rooms).
As you can see, a challenging location does not have to mean the seller will struggle to find the right buyer at an acceptable price. By focusing on other attributes of the property that will attract existing or prospective businesses to locate there, a seller and/or listing broker can achieve the desired result.
In the case of the veterinary practice mentioned in the above example, that property went under contract within a month of its listing and the sale closed 60 days later.
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William F. “Felton” McLaughlin, CCIM, SIOR
14 Corporate Woods Blvd.
Albany, NY 12211
Direct: 518-465-1400 Ext: 208
Fax: 518 465 1441