The fundamentals of selling commercial property are no different from those of selling residential property. Buyers are considering a number of similar criteria such as location and price. Whereas home buyers like to consider if they can see themselves living in the new property, commercial property buyers will be looking to picture themselves doing business in the commercial property that they are viewing.
There are a number of key considerations for selling commercial property that we will be looking at here, but at their core is the fact that, as a seller of a commercial unit – be it a warehouse, office building or retail store – the seller must bring a thorough understanding of what the commercial property buyers are looking for from their sellers.
Let’s take a look at each issue in more detail.
Location
Once again, just as is the case in the purchase of residential property, the first three things to consider are location, location, location. Such considerations will differ, depending upon the unit in question.
If the commercial property in question is an office building, then access to good transport links will be important to new prospective tenants. Naturally, this concern can be slightly offset is the office building in question is situated in an industrial park with adequate parking for all employees, as well as visitors to their businesses.
If the property is a retail store, buyers will be looking at foot traffic numbers. They’ll want to know what time the majority of stores open and close and if there is adequate parking for shoppers.
One other major consideration when looking at the purchase of a retail unit is the competition that exists in the area. If buyers are planning to open a niche store or bring together a series of eclectic services under one roof, then the threat of local competition doesn’t really become a concern.
However, if the goods and services on offer in this new store are also available at a supermarket that’s within half a mile or less, then this new business is likely to struggle.
Of course, this doesn’t mean that retail units close to local supermarkets are impossible to sell, and this article is meant as a guide on how a commercial property owner might do just that. The recommendation here is to position one’s marketing to appeal to those businesses who do not feel threatened by the larger supermarket chains and thus generate a campaign which speaks directly to their unique offering.
If we look into the hospitality sector, that is pubs, bars and restaurants, then, once again, location is of paramount importance. If a high street is demonstrating high footfall, particularly if a town centre is pedestrianised, then those restaurants situated on that high street are likely to succeed in terms of lunchtime trade. However, once the surrounding shops have closed, this same foot traffic will have disappeared, at which point a restaurant on the outskirts of town with ample parking for customers will fare better when it comes to dinner service.
Pubs are naturally busier in the evenings too. Pubs in the City of London, for example, enjoy a roaring lunchtime trade, and whilst a good number of office workers enjoy a drink after work, many of them prefer to head home, which is why the City can often feel like a ghost town in the late evening or over the weekend.
The logistics sector has the most obvious considerations when it comes to location, and that is proximity to road, rail, air and sea links. They also need to consider their staff, thus operating close to towns and cities where a large number of their employees are likely to be living, and for those people, access to local shops and restaurants for their lunch breaks is also important.
As we mentioned at the outset, the buyer of any commercial property is thinking about their customers, be they shoppers, diners, office workers, or warehouse personnel. As the seller of that commercial property, it’s important to understand that mindset and market the property accordingly.
The Planning Class or Zoning of the Commercial Property
This is of particular relevance when looking to sell a commercial property on the high street, such as a retail shop or restaurant.
Retail units all sell with classifications. A classification of A1 will allow the new owner or tenant to open a shop. If the unit is classified as A2, then any business offering financial services can operate there. Moving to A3, that classification is for restaurants and A4 is for pubs.
Changing classifications can be both costly and slow. That’s why you will usually see, for example, one restaurant opening on the site of a restaurant which closed down. It’s substantially easier to downgrade classifications rather than upgrade, so if a unit is available with an A4 classification, then it is in an enviable position, as it is much easier to reclassify it to either A1, A2 or A3.
Of course, it is not impossible for reclassification – many restaurants and bars opened on the sites of old banks in the early part of the 21stcentury because it was considered ‘trendy’.
Many more stores are becoming more enterprising when it comes to classification. For example, many clothing stores now have coffee shops inside them. Technically a coffee shop should have an A3 classification, but the grading applies to the predominant business. Plus, if more coffee is taken out than is consumed on the premises, then the store has a classification of A1.
The Size of The Commercial Property
It should come as no surprise that the size of the property is going to be an important consideration for buyers. When preparing a buyers’ information pack, square feet or metres – along with the number of levels – is vital information.
It’s also important not to be misleading at this point. The size quoted to buyers is the area within the property in which they can conduct business. Corridors, stairs, bathrooms and kitchens cannot be counted. One grey area is staff rooms, as whilst business is unlikely to be conducted there, rooms could be used to house admin staff and as such, are being utilised for business purposes.
The Price
It might seem strange to have not opened with price, but as any seller of commercial property will tell you, price is not always the primary consideration when looking to purchase a commercial property, although of course, it is still something which needs to be calculated to maximum effect.
The evaluation of the price of commercial property works in very much the same way as it does for residential property. It’s advisable to research similar units in the area – ideally those with the same classification as well. Thereafter, the factors mentioned above will help determine the correct asking price.
For example, an office building within 5 minutes’ walk of a train station is going to attract a higher value than a similarly sized building whose closest rail links are 10 miles away. Looking at the high street as another example – an estate agent’s office on the edge of town with a double fronted corner location is going to be worth more than one in the centre of town. Estate agents have long been aware that the former example is a prime location for them, and the values of these commercial properties reflect that.
Doing one’s own research, however, may prove rather costly in terms of time as well as money. All of the leading commercial estate agents have a wealth of knowledge of their local area and all will be more than happy to provide a free valuation service and there now exist a number of online portals where owners of commercial property can share the most relevant details about their property with multiple agents, all at the same time. Thereafter, these same agents will contact the owner to arrange to meet and provide a more detailed and accurate valuation, along with a proposal on how they are going to assist with the sale of the commercial property.
Fees
The valuation may well be free of charge, but there a number of fees to be taken into consideration when looking to sell a commercial property. Whether it’s a single retail unit, a warehouse or an office building, these fees generally apply and are proportionate to the value of the property itself.
As with any transaction involving property – whether it be residential or commercial property, it is advisable to shop around. Granted, one’s primary focus may not be working with the cheapest partners – many are more than happy to pay for higher quality service, but with an array of partners available across the entire buying and selling process, slowing things down to assess the entire marketplace could prove incredibly valuable.
Estate Agent’s Fees typically run at between 1% and 3% of the purchase price. Like the residential market, local estate agents in the commercial property sector are in competition with each other, and this gives the seller the opportunity to negotiate.
The seller should also consider that many local agents are likely to have the same buyers registered on their database. Many estate agents may ‘bookend’ their valuation by telling the seller that they already have a buyer in mind and are keen to get back to the office and tell them all about the commercial property for sale. It’s not necessarily a sales tactic – it may well be true.
Traditional thinking would suggest that this means they can afford to quote the upper end of the commission scale and charge 3%. However, the shrewd negotiator should point out that if their commercial property is as attractive as the agent says it is, those other agents may well have that same buyer too, and as such, whichever agent is charging less will be given the instruction to act as the commercial property agent.
Solicitors will need to carry out conveyancing on the commercial property in question. Property owners may well have worked with the same solicitors for years and will, therefore, feel a sense of loyalty to a particular law firm. That being said, such loyalty should sometimes be rewarded and it is worth asking the solicitor if there is any movement on their fee.
It’s also worth noting that whilst the solicitor’s fee is essentially fixed, the seller is paying for a service. If the sale ends up taking longer than it should and is riddled with conveyancing issues, then the commercial property seller is well within his or her rights to insist on paying less than agreed for the service, as compensation for their lack of satisfaction. Naturally, one does have to consider a sense of fair play here, as the issues could have all arisen from the buyer’s solicitor.
Mortgage fees are our next consideration, and there are two possible fees at work here. Unless our seller is liquidating the asset, then they may well want to transfer an existing mortgage from the current commercial property to their next investment. There is always the possibility that their lender will not permit this, hence a new mortgage will need to be arranged, which does levy and arrangement fee.
If the commercial property investor is in a position to pay off the mortgage on that property early, then it is likely that he or she will be liable to early redemption fees. It’s always a good idea to look into the redemption penalty clauses on any mortgage agreement before agreeing to them.
Commercial property investors should utilise the services of an independent financial advisor and/or accountant, as the sale of a commercial unit could fall under the scrutiny of the HMRC who will require you to pay Capital Gains Tax.
And finally, removal costs. Many commercial property sales, particularly office sales, will include all equipment, furniture and any other fixtures and fittings as part of the final sale. If this is not the case, then all of this will need to be removed at the expense of the seller, and unless they’re being transferred to a new office building, then the seller is going to need to pay for storage as well as advertising, should they decide to sell everything off.
Preparing the Commercial Property for Sale
Taking into account all of the considerations of the buyer, and being made aware of all of the fees that are likely to be incurred, it’s now time to prepare a buyer presentation pack.
In addition to the information mentioned above, some other smaller, but pertinent details include:
-A commercial energy performance certificate. It’s been the law since 2008 for any property, be it commercial or residential, to provide an Energy Performance Certificate. They can be ordered for as little as £35 and it is also illegal to ask the buyer to pay for it.
-The seller needs to detail EVERY cost for which the buyer will be liable. These will include Stamp Duty Land Tax. There is no Stamp Duty on any commercial property up to £150,000. From £150,001 to £250,000 the rate is 2% and this rises to 5% for anything over £250,001. So, for example, a commercial property sold at £300,000 would attract Stamp Duty of £4,500.
-They’ll also need to be made aware of business rates. These rates are calculated by the local council and there are a number of websites that offer online business rate calculators.
-Like many residential buyers, commercial buyers are also looking for a commercial property which they can expand. If so, does the property come with planning permission or is there a planning application currently submitted to the local authority? If planning permission has previously been denied, then this must be declared to the buyer.
-And finally, have any specific surveys been carried out on the commercial property. If, for an example, an Asbestos survey has been completed and the recommendation is for removal, then again, such things must be declared to the buyer. The sale would then factor in who is to be responsible for the removal – the seller, prior to a new occupation, or the buyer at a reduced sale price to factor in the cost of the works.
Selling Commercial Property Fast
For some commercial property owners, time is of the essence, and they will be prepared to accept a lower than market value offer in exchange for an expedient sale.
One way to do this is through auction, and the restrictions that exist here are the same as those that exist in the residential auction market. High sales fees and no real guarantee of success have lead to an increase in the activities of registered property buyer companies.
These firms will typically offer between 80 and 90% of market value and the seller trades this 10% loss against the benefits of selling to a cash buyer with the legal team to push through to exchange and completion within a matter of weeks.
It’s worth noting that the demand for commercial property in the UK is currently high, and thus the commercial property seller taking that, as well as all of these other variables into account.
