Monday, May 28, 2012

Beyond The Acquistion Cost - Due Diligence Review

Now that your planning issues are resolved, it’s time to evaluate the building/property on an overall basis. This is the part of the buying process which is typically referred to as the ‘Due Diligence’, and it allows you to investigate the property for problems that may be present or maybe uncovered after finalizing the purchase. The most common elements of a due diligence review can include the following areas:

Physical Condition – a review by a qualified building inspector or engineering consultant. This would be centered on the structural issues relating to the building, electrical/plumbing services, heating/cooling systems, interior finishes, and any other relevant site improvements (ie. parking lot). Costs to complete necessary building inspections can vary widely, depending on the scope of the review required, size of the building/property, and differences in the use of the property for your purposes. The goal should be to determine any and all deficiencies which you will assume, and to estimate those costs prior to finalizing a purchase agreement.

Environmental Review – this is a matter that varies based on jurisdiction, but for the most part is a requirement that most Buyers should conduct not only for themselves, but will be a requirement for mortgage purposes. This will involve a qualified environmental engineer and a written report outlining the findings of their review/investigation. The involvement of the engineer and costs for their engagement, will be purely dependent on the extent of environmental issues present. Again, understanding any related costs for environmental problems is critical to know at this point in the process.

Title Review – this is often best completed during the due diligence process, to ensure there are not title matters affecting the property which you are either unable or unwilling to accept. It should reveal any easements, property restrictions, and liens/encumbrances which affect the property and ultimately impact your use of it. Typically your lawyer will complete this as part of your purchase, but it may not always be done this early in the buying process, but it can be prudent to do so.

Other items that can be considered within a due diligence review might include:

• Building Code/Zoning Restrictions
• Heritage Designations & any Compliance Issues
• Building Equipment Review (ie. Cranes/Docks/O-H Doors)

Bottom-line -- you need to determine what the issues are relating to the property and what the associated costs are, prior to finalizing a purchase agreement.

Again, seek out experienced commercial realtors within your market and review a Due Diligence checklist, prior to finalizing a purchase.

Friday, May 18, 2012

Beyond The Asking Price - Space Planning

Still on the ‘buy side’ and putting aside all of the analysis on valuation & pricing, it is time to do some planning… more specifically space planning. This part of the exercise will apply to any of the alternatives you might be considering on your property short-list.

If you intend to occupy the building being purchased (either all or part), it’s a good idea to prepare a graphic outline of how the space needs to look for your business purposes. A proper plan reflects wall/door locations, room sizes/labels, hallways/baths/common areas, and even furniture layouts.

Specifically your requirements might include the following:
i) reception/waiting area
ii) meeting/boardrooms
iii) administrative/ ullpen areas
iv) designated offices
v) kitchen/baths/storage areas
vi) handicap accessibility (NB : review most recent building codes applicable, to determine any retro-fit requirements)

Once you’ve done the planning and determine the necessary changes needed, it is time to do some ‘costing’. This will increase the price of the property acquisition accordingly, and it should be accounted for prior to finalizing any bid on a property. Often times, this becomes the difference between alternative buildings, in that the actual ‘turn-key’ price can favour one property over the other.

As a further note, this exercise can be included within a 'Due Diligence' condition within an offer, and should be dealt with on that basis, given the importance of planning your operation within a new location. Good planning usually yields good results - and when acquiring a commercial building, it is well worth the effort.

Next up… examining the overall physical condition of a building/property which you are considering..

Again, seek out experienced commercial realtors within your market to assist in acquiring the right building fit for your business needs.

Thursday, May 10, 2012

Building Valuations - Site Considerations

In examining a price/ft. analysis on a specific building or in comparing other property options, ensure you review the site considerations of the properties involved. Namely, the site size and the site coverage.

The site size is simply the amount of land that is being sold with the building. Is it an acre or 20,000 sq. ft.? Beyond its size -- is the lot square/rectangular/pie shaped? You might also consider its positioning (corner lot/mid-block) and if it includes any natural
hazards (ie. drainage ditch/restricted wood lot).

Site coverage than becomes a measure of the % of the site the building occupies. For instance, a 10,000’ building on a 40,000’ site, gives you a site coverage of 25%. A lower % usually suggests that the site is not developed to its fullest potential, whereas
a higher % (say 50%+) may suggest the site is fully built out.

In the case of site size (ie. 1 vs. 2 acre), a premium allowance may need to be made, when considering the building price/ft. for the property on the larger site. Similarly a low % lot coverage may a again suggest a premium per/ft. allowance, given the apparent ability to expand the building on the current site. Note however, that this is something you need to review very thoroughly with your local municipality (specifically building department), to confirm the ability to expand.

The above may help explain price/ft. differences in looking at comparative real estate options in your market. They may also help you to justify your ultimate purchase. But more importantly it is only one further metric and still must be weighed against other variables – such as building condition, age, location, zoning issues and mortgaging options.

Site issues clearly need to be considered when considering your commercial property options, and hopefully this gives you a means to quantify sites in making comparisons. Again, consult an experienced commercial broker in your market to assist you in your site considerations and as you evaluate property options.

Wednesday, May 2, 2012

Building Valuations - "Lack of Comparable Sales"

Where do you go, when there are not sufficient comparables to compare the building/property to? How do you arrive at price per ft., where legitimate sales data does not exist or is not readily available?

Typically this topic can be based on any one of the following conditions:
i) A market with a historically low turnover of buildings
ii) Market substantially down from recent year highs
iii) Small market location (ie. rural, isolated town/district)
iv) Lack of institutional financing available
v) Poor economy & market dominated by distress sales only

Any of the above conditions, can be a major challenge in trying to peg a building value. But alternatively, there are certain things you can do to help you in your valuation process. Specifically, consider the following:
i) Look at the property’s assessed value (for tax purposes)
ii) Review all ‘active’ listings (not sold) on the market
iii) Order a “Fee Appraisal” from an Appraiser
iv) Review mortgaging options/ceilings with area lenders
v) Consider greater time adjustments (ie. going back 2-3-4 years)
vi) Expand your locational/area search for comparable sales

In the case of the last 2 points, these should be as a last resort and certainly it needs to include some sort of ‘discounting mechanism’ in applying them. For instance, if there are good comparable sales going back 3 years, you need to apply the changes in the overall market during that period (either +/-). Just a further comment on the ‘Fee Appraisal’ - it will most likely include a list of comparable sales which the Appraiser feels are appropriate for valuation purposes. Since an appraisal is most often required in order to arrange financing, it’s generally an investment that has to be made in any event.

One final thought on being challenged on arriving at a fair value. If it’s that difficult, perhaps its not a good investment and you should continue to look at other options. At the end of the day, if you can’t value it properly today, you could have the same problem as the Seller down the road!

Again, tap the expertise of an experienced commercial broker in your market, to help you with your valuation challenges. To watch our YouTube video tours, click here.