Wanna buy a warehouse?

April 15, 2010 1:51 PM

What information do I need to have at my fingertips to profitably negotiate the sale of a commercial rental property? Or should I even do it?

I have been handling my mother's affairs since age and infirmity have left her unable to do so.

My mother owns a small warehouse and office complex used as a trucking terminal by a shipping company. It's a large bay in a steel-frame building with a 5-ton box crane so drivers can redistribute loads and park their rigs indoors, and a loft area with a kitchenette, bathroom, and bunk for them to freshen up and catch some sleep. There are two offices downstairs used for training and meetings and paperwork. The tenant is great. They've been with us for more than a decade and they've always paid on time, never made unreasonable requests, and have always been a pleasure to deal with.

Today I got a call from the president of the truck line that rents the warehouse. He wants to meet with me next week. I'm certain he wants to make an offer to buy the place. This is timely, as my mother's savings are dwindling due to the cost of her care.

The property is in a bad neighborhood, but it is fenced in and reasonably secure. There is a slow-moving roadworks project that will run almost right in front of the building when the roads are finished (2015? 2017? Next Wednesday? Never? Who knows?), potentially giving us frontage access to a major throughway.

This property generates my mother's only income, about $40,000/yr. There is no mortgage on it: we own it outright with zero debt. I know the appraised value, because I just paid the property taxes on it, and it's not appraised for as much as my description might lead you to believe. Should I even sell it? Should I wait until the roadwork is finished, hoping for a spike in property values? I don't want to alienate my tenant -- but they've also been there so long that I don't think they'd consider picking up and moving.

Do I need to retain an attorney? Consult a commercial real estate agent? Do nothing and say it's not for sale?

I really don't know what to do here. Please hope me!

(Posted anonymously to keep family financial matters private.)

posted by anonymous to work & money (8 answers total)

If it's her only income, there is no debt on it, and there is a reliable tenant who is unlikely to leave, I would hold onto it. Depending on what your tenant has to say, you might want to give them a slight discount on their rent, just to keep them happy. Only do that if you really think you need to. If you don't currently have a lease with them, get one, and keep it current.
posted by wwartorff at 2:02 PM on April 15, 2010

If you are going to sell the property, I would use a good commercial realtor as there are so many contractual things that if you make a mistake you could be subject to liability/litigation/etc.
posted by MsKim at 2:06 PM on April 15, 2010 [1 favorite]

That all really depends upon the appraised value of the property.

You also need to consult with somebody regarding how this will effect any Medicare/Medicaid/Social Security payments your mother may be receiving or eligible for. On one hand, she'll lose her income, but will now have an enormous pile of cash lying around.

I have no idea what the implications of this are, but I'm sure there are some.
posted by schmod at 2:14 PM on April 15, 2010 [1 favorite]

I think that it is hugely important for you (on behalf of your mother) to find someone knowledgeable in Medicaid planning. Creating Medicaid eligibility (or otherwise manipulating asset ownership) is a very necessary part of long-term care planning. Your best bet is under the rubric of financial planning, although I suspect that local lawyers who are involved in estate planning (wills, etc.) will be able to give you references. (I suggest trying to find someone who charges a flat fee or an hourly fee; in the situation you've described I think you should look with suspicion on people who want to administer the funds on commission or for a percentage of the funds under management.)

A commercial real estate broker may be able to give you some hints regarding valuation, but make sure you understand how the broker is going to be compensated before entering into any agreements. Likewise, if you wind up selling you will certainly want a lawyer to review things, but let's take things one step at a time.

When you sit down with the tenant, is there any downside to not knowing anything about property valuation or long-term plans? It is really a question of negotiating strategy. As long as you are clear that you're not able to make any decisions without checking with your mother and her other advisers (financial and legal), I don't see any harm in sitting down and seeing what the tenant is proposing, whether it's a sale, extending the lease, or something else.
posted by QuantumMeruit at 3:19 PM on April 15, 2010 [1 favorite]

Another thought occurred to me.

Presumably, the warehouse has appreciated in value. Another factor to consider is that a sale now would presumably result in capital gains taxes.

A sale after the OP's mother passes away would likely have capital gains calculated on a step-up basis, which would (likely) greatly reduce the capital gains tax liability. It depends on the amount of appreciation involved, but it could be significant.

If funds are needed immediately, there are options (or at least there were before lending got all wonky). It might be tough to find a lender who would be willing to do a reverse mortgage on a commercial warehouse, but you never know.

Put another way, it seems that the issue which drives all others is what are your mother's needs (cash, Medicaid eligibility, tax savings for heirs) and how can you use the asset (warehouse) to best satisfy those needs.
posted by QuantumMeruit at 3:35 PM on April 15, 2010

If the appraisal you mentioned was done by the county for your property taxes then it probably does not have high relevance to the true market value of the building. Their valuations are often based on recent sales of comparable properties which may or may not have had tenants as strong as yours.
One method of calculating commercial buildings is by capitalization rate. Is the $40,000 the net income? If so, divide 40K by the cap rate prevailing in your area for that type of building. The rate can range from 3% for rock solid deals in excellent locations to 10% or higher for no-tenant/risky tenant deals in poor locations. Sometimes LoopNet or other publically accessible commecial sites will show the cap rate on buildings for sale.
You could ask a commercial broker for assistance, but they are going to want a slice of the pie ~ 6% to split with a buyer's agent.
Definitely don't sign anything, including whatever a broker may give you, without consulting your lawyer first.
posted by Crashback at 4:06 PM on April 15, 2010

My guess is that the tenant is no dummy and reads the paper. He knows values are down, and he's thinking he'll get a good deal with greater income potential in the future when the roads are built. If it were mine, I'd hold on to it, assuming your mom has enough to cover expenses for the next year, by which time most people think unemployment will go down an values will tick up.

If you want to sell the property, get a broker (disclosure: I work for a commercial real estate association that trains brokers, among others involved in commercial real estate transactions). The broker will want a slice, but you'll share the same goal--getting the highest sale price.

Every market is unique, but across the board, there's been so little commercial activity. That makes valuing a property difficult, which is why I'd also appeal your taxes if you still can. Good luck.
posted by tenaciousd at 6:10 PM on April 15, 2010

The appraisal for tax purposes is not the same as an appraisal of selling price. You have no idea of the market value from looking at what your assessor's office is using to figure the tax.

You probably don't need any information at your fingertips to meet with the tenant. Maybe he wants to talk to you about something else. If he says he wants to buy it, it's unlikely he would be expecting you to answer on the spot (even if he acts like he is).

Laws and customs around real estate differ around the world as well as between different states in the US. Things are very different between England and the US, for instance. I suggest you find an appropriate professional to help you if he does want to buy, the sort of person who would deal with these sorts of transactions in the state or country the property is in.
posted by yohko at 10:48 PM on April 15, 2010