How to negotiate a commercial property purchase

How to negotiate a commercial property purchase

August 16, 2019

Commercial property purchasing is worlds apart from residential property in many ways. Scenarios for getting the best deal differ greatly from property to property and negotiations can be wide-ranging, and complex. That doesn't mean steer clear, commercial properties can make fantastic investments, however, you do need to have the right legal team on board to make sure you get a fair deal.

Knowing what you want ahead of time is only half the battle since your requirements will change from property to property depending on the property age, location, maintenance, set up and lease terms as starters.

The worth of a commercial property isn't cut and dry either with property prices based on expected profitability, economic growth, usage, and zoning, to name just a few.

There are many questions to ask, is the yield commensurate with the wider market? Is there a tenancy in place? What are the leasing terms?

If the answers to any of these questions are not to your liking, it doesn't necessarily mean no deal, there is always wiggle room and alterations to work things out in everyone's favour, although you need to make sure the property ticks enough of the big boxes to make negotiating the details worthwhile. The outcome of negotiations can include improvements, conditions placed in your favour and lower price.

When it comes to negotiating a deal that works for you, here are some things to keep in mind.

Is this commercial property right for me?

You need to know before you get started what your business or investment goals are. Do you want high yield, longevity, depreciation or capital gains? Your desired goal will help narrow your search to office, factory or retail buildings which each have their own risks and rewards. Make sure you are looking in the right area to find the property that will get your bigger goals met.

When you know you are going to get the benefits you are looking for then you can take a more strategic approach to negotiations.

Research

I've stressed before how important research is before buying a residential property; your own research as well as professional market research. When it comes to commercial property, triple it and throw in some hard-core detective work. There are many more things to take into consideration, like contamination, zoning, faults in the title, the historical performance of the tenant and also the performance of similar properties in the same location. Independent research is critical to help predict capital growth, yield or sustainability. Ideally, you want to look over records dating back as far as seven years. If you find any discrepancy with your research findings and the property description it's usually a solid base for negotiations.

Expenses

Hidden costs are another trap you want to avoid. In some unlucky cases, you will be asked to fork out expenses as soon as the settlement is completed. If the previous owner or tenant had set up, running or maintenance issues that will impact your future returns or ownership, it's up to you to speak up and get it sorted before you sign the contract. If not, hidden costs may be passed down to you, like waste removal, contamination, safe removal of underground storage tanks and many more.

The best bet is to have the owner or the tenant remove the issues before the end of the settlement, hazardous waste removal can be a bit of a logistics nightmare. The next best option is to negotiate a lower price based on the cost you will absorb.

Property condition

The condition of the existing fit-out will largely depend on the tenant. If the building is currently tenanted you can expect the fit-out to be up to date and in good condition. If the current tenant is responsible for maintaining the fit-out (as is the norm) but has let it lag, you will need to negotiate that the tenant gets up to date as part of your purchase. It's in everyone's best interest to have the asset maintained and modern. Carefully check the lease agreement to know what provisions are in place and make sure they are being met.

Another legal trap with this one is the registration of part-ownership if the tenant has contributed funds to the fit-out so make sure you look into this as well.

If the previous lease was some time ago, the owner may have deliberately left it "as is", ready to customise to the next tenant. You will need to include terms for any incoming tenants to undertake a new fit-out every few years to ensure the property is maintained to a high quality. You may want to negotiate a decrease in the property price so you can customise a fit-out to attract a new long-term lease.

Current lease agreements

Check the tenant's payment history to know if there are payments in arrears. This may be an indication of poor tenant quality or poor management. To prevent any difficulties when you take ownership be sure to negotiate with the current owner to settle outstanding debt or possibly make allowances for the difference (and trouble) in the property purchase price. The other thing to note here is if the rent is the correct price.  You may need to negotiate if there are discrepancies by way of rental review or property price adjustment.

The most important thing is that you have a legal profession there with you to make sure you get your fair stake to avoid these and other complexities in your commercial property purchase.

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