Beware of Commercial Real Estate Marketing Gimmicks

In many instances, our commercial real estate market has progressed to the point of absurdity.

Some examples:

Six full-priced offers on a new listing with an asking price that eclipses recent comps by 15 percent.

Or, sellers who are “dug-in” and not willing to listen to reason and therefore are unwilling to budge on their expectations.

Finally, an occasional tear in the fabric which defies logic — a well located, improperly exposed building sells for 20 percent less than it is worth because the seller experienced a transition and couldn’t wait for the normal marketing process to unfold.

During these crazy times, we often encounter “gimmicks,” which this column will hopefully diffuse and provide a warning to unwary buyers.

I’ll just guarantee the rents

Occasionally we encounter a building with remnants of the last downturn: The occupants signed up during the recession and consequently are paying a rent less than the current market will bear.

The economic value of an income property is dependent on the rent. More rent, more value.

Enter rent guarantees. The owner — hopeful to get maximum value —  will supplement the difference between market and the amount his tenants pay. Good in theory. Bad in practice. Any savvy investor will ask what happens when the guarantee ends? Now, I am stuck with an under-market rent on a building for which I overpaid.

Below market asking price

This suggests one of two scenarios. Either the building has a latent issue — a partnership squabble, a non-prepayable loan, environmental contamination, a long-term lease at an under market rent, imminent city action for re-development, or the like. Or, the listing broker has underpriced the building to attract multiple offers, create a bidding war and generate activity above the market rate.

If you are a buyer caught in this vortex, the pain never stops until someone says uncle!

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