Frozen credit provides opportunities in commercial real estate.
The current market--while frozen as a result of the lack of available credit--has created a number of commercial real-estate opportunities, some obvious, while others overlooked.
The most talked-about opportunities are in leasing. Growing vacancies and declining rentals across the country have provided the impetus for companies to either restructure their leases to lower their effective rents with reduced rates and increased concessions or consider relocating to upgraded space.
A less talked-about option--but also a viable one to control or even lower long-term occupancy costs--is to purchase a commercial building or acquire an equity position in one rather than continue to lease space as a tenant.
The rapidly growing inventory of buildings, a reduction in pricing, and diminished competition from investors and speculators either waiting to see how the market shakes out or who no longer have the ability to buy real estate, have created opportunities for business--the ultimate end users of space--to own their own buildings.
To Lease or Buy?
Such a strategy offers companies the opportunity to both build equity and contain occupancy costs. Businesses have always acquired buildings; they even did so in the past several years when prices were grossly inflated.
However, such a strategy may be wiser today for some to consider owning rather than committing significant dollars to another long-term lease that lines a landlord's pockets with years of rental income.
Consider Seller Financing
With conventional lending virtually frozen, how can these building sales come to fruition? The lack of institutions extending real-estate financing has prompted the use of purchase money mortgages, better known as "seller financing."
While this can be an effective financing option for both the seller and the buyer in all types of real estate markets, it's a particularly essential one in these challenging times to get transactions completed.
It enables the buyer to purchase the property and the seller to sell it more quickly without the red tape and costs associated with using a third-party financial institution, as well as potentially obtaining more favorable terms.
It may also be particularly advantageous for sellers who have depreciated their property and possibly face a capital-gains situation triggered by a sale. Through this structure, sellers may be able to defer their capital-gains exposure, while at the same time earn accrued interest on the loan they area providing.
In effect, with such arrangements, the seller becomes the first mortgage or "the bank." The buyer provides the seller with an acceptable down payment and then finances the balance with the seller in accordance with the agreed-upon terms of the mortgage; it's the same scenario that would ensue using an outside lender.
The seller should conduct the same thorough due diligence as would a traditional lender, to be satisfied the buyer is credible and able to fulfill the loan obligation.
In a recent transaction, Studley represented a buyer in the purchase of a property with a contract that did not include a financing contingency. To acquire the building, the buyer was utilizing his own capital, as well as drawing from an existing credit line with his primary bank. As the closing date approached, the bank, with which the client has worked for years, notified its customers that it was freezing all open credit lines and not issuing funds to anyone in the near term.
The buyer did not want to forfeit his 10 percent deposit and the seller did not want to sacrific the sale. So, to complete the transaction, the seller arranged to take back a first mortgage for three years at a reasonable interest rate, based on two-thirds of the purchase price.
When the credit freeze eventually thaws, the client can then seek long-term, permanent financing from a third-party lender, if desired.
Firms contemplating these strategies must evaluate their short-and long-term goals, accumulated capital, cash-flow projections and tax situations. Most importantly, they should consult with their financial, legal and real estate advisers.
Frozen credit does not have to hinder transactions from successfully taking place. Now is the time when ingenuity prevails and opportunities can be attained.
Michael J. Weiss is a managing director in Studley's central New Jersey office. Studley (www.studley.com) is a commercial real-estate services firm specializing in tenant representation.
|Printer friendly Cite/link Email Feedback|
|Title Annotation:||QUICK STUDY|
|Author:||Weiss, Michael J.|
|Date:||Jan 1, 2009|
|Previous Article:||Diversity & inclusion: insights from American Express, Cargill and Prudential Financial about internal programs and what works.|
|Next Article:||COSO's new guidance for monitoring internal control: a new COSO publication is designed to leverage the monitoring function to make internal control...|