An Experienced Commercial Real Estate Agent Can Save You Money…And Save You From A Headache!

In the past decade we’ve seen an amazing rebound in real estate since the great recession.  With the recent strength in pricing and sales, hundreds of new agents have received their real estate licenses and become realtors.  While many companies in our area offer excellent training, there are so many different facets to each real estate transaction, that experience is the only way to learn all the complexities and pitfalls that can arise and give agents the knowledge they need to protect their clients.
After sixteen years in the business, we still come across new situations each year.  Luckily, experience has taught us how to guide our clients through the process of purchasing, leasing, building, or selling in a way that guards their interests along the way.  This month, I wanted to highlight some of the issues I come across every year that could potentially be very expensive lessons for an inexperienced buyer if his or her agent is unaware of the hidden expense.
Here’s a $100,000 example that a buyer I worked with had no idea could cost him that much.  The buyer was a small restauranteur that decided to expand from his existing location into a larger building.  The existing building was set up as a restaurant when he leased it and there were no big surprises when he started the business.  He called me when he had decided to convert a retail store into a restaurant and add a kitchen.  He knew he would need health department approval and that kitchens were expensive to build out.  He also knew that the landlord might not let him put a hood system in because of the need to vent through the roof.  He did not know that the township would charge a fee for water and sewer benefits that varied based on the number of seats he would have in his restaurant.  Often 1 water and 1 sewer benefit can cost more than $8,000 combined.  While the township may require a retail store to have 2 or 3 water and sewer benefits (it depends on the size of the store and uses of different areas), a restaurant may be required to have 1 benefit for every 8 seats.  That means a 120-seat restaurant would need 15 benefits.  In this case, the buyer would need to buy an additional 13 benefits from the township.  At $8,000 each, that’s a $104,000 fee just to be allowed to open the doors.  I’ve worked with a number of out of town restaurant groups that did not know about this local requirement and wouldn’t have been able to afford to open if they found out after they already purchased or leased a space.  Also, an experienced agent would know to find out which buildings already have multiple water and sewer benefits or which townships do not charge fees for water and sewer benefits (such as in Traverse City limits).
Properly analyzing investment property is another area that takes years of experience.  I’ve seen a lot of properties advertised for sale showing high returns that entice buyers and get them interested in an investment.  Being able to look at the income and expenses and determine if the rents are above or below market and if the cash flow is sustainable is invaluable to clients.  One of the biggest areas that gets overlooked is how the future income will be affected by the property taxes becoming uncapped.  If a seller has owned her building for a long time, the taxable value is often way below the current value of the building.  If a buyer purchases the building, the year after the acquisition the property taxes will be uncapped at the current value for that year.  For example, a $500,000 building may owe $13,000 a year in taxes when it is uncapped.  If the current owner is only paying $6,000 per year in taxes, the new owner will be making $7,000 less than the previous owners, just due to the tax increase.  On a $500,000 investment that could be the difference between earning 7% return or 5.6% return.  If the buyer has financing at a 5% interest rate they could find themselves putting cash into a building each year, when they thought would be receiving cash from the investment.
Some leases require the tenant to pay all the expenses of the building, including real estate taxes.  These are called NNN or triple net leases.   If the previous example had a triple net lease, the new tax rate would not affect the landlord’s return because the expenses would be paid by the tenant.  However, what happens if the tenant cannot afford the increase, or if the tenant says they need their rent lowered when the lease term ends, in order to afford to stay?  When representing a tenant in a building with a triple net lease, an experienced agent will counsel the tenant that if the landlord sells the building, they may incur this additional liability.  The agent can also structure language in the lease to protect the tenant from large increases in expenses such as a property tax uncapping.
There are too many due diligence items to effectively highlight all of them here, but being able to guide a client through the process can definitely help reduce headaches and keep as much money in the client’s pocket as possible.  Imagine buying a 3-acre development parcel with plans to put up a 20,000 SF building and 100 parking spaces only to find out that 2 acres of the property are not usable due to wetlands, clear vision area, road right-of-way’s or setbacks.  What seemed like a fair price per square foot could be much more expensive than originally anticipated and having the right team of experts to help guide a buyer through the transaction is essential.  Knowing a wetlands consultant that can walk the property before spending tens of thousands of dollars on site planning could be just what is needed for a buyer.  An experienced agent will have a team of experts that include environmental companies, architects, engineers, wet land consultants and bankers to use as a resource.  Financing can be a major obstacle to completing a transaction and knowing what loan programs may be available in different situations can be the difference between a sale occurring and falling apart.
Experienced agents are going to be familiar with properties that are not currently on the market but might be coming on the market soon.  They may know an owner that has been thinking about selling, but not listed his property yet.  The current market has a very low inventory of available properties and this kind of market knowledge becomes even more important in a tight market.
When negotiating any kind of contract having the experience to see what is important to both sides of the transaction is going to give an edge to both the Buyer and Seller.  While price may be a driving force for sales or leases, it is often the terms that are even more important and being able to give each party what they need to successfully complete the transaction that makes the biggest difference.  This is especially true when there is a business involved with the real estate.  When selling a business, the parties must consider the timing of the sale, non-compete agreements, how business assets will be transferred, training agreements and a host of other complexities that must be agreed to and work for each party.
Next month, I will highlight the complexities of tax prorations when purchasing a property and why it is so important to understand the different ways a purchase agreement can be written to benefit a seller or a buyer.  It can mean the difference of a whole year of tax payments and is complicated enough that it is worthy of its own blog.  While most agents try their best to guide clients into making smart decisions, having experience in complex transactions is what sets apart a good agent from a great agent, and can save a client time and money.
Dan Stiebel

Dan Stiebel

Associate Broker
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