Frequently Asked Questions
Q. I’m looking for a commercial site to relocate my business. Does it make sense to use a buyer rep to help me with this process or can I go it alone?
A. Almost without exception, it makes sense to use a buyer rep. When it comes to commercial real estate, a lot can go wrong. Buyers who try to go it alone often find themselves navigating in unfamiliar waters. There are many issues that need to be addressed and an experienced commercial agent will be familiar with those issues. Also, the buyer rep will help you locate potential sites both on the market and off market. Once a site has been identified, the buyer rep will use their expertise in negotiating the right price and terms on your behalf.
Q. I’ve heard the term “business broker”. What exactly is a business broker and what do they do?
A. A business broker is a specialist with extensive experience and expertise in helping people buy and sell businesses. They can provide expert guidance that can save you precious time and money. These brokers are well connected with financial institutions, accountants, attorneys, and other professionals needed to facilitate a sale. This service is far different from selling a home. The business broker will establish the value of the business, create a marketing package, provide marketing exposure, and negotiate the sale. This area of expertise is conducted by a very small percentage of licensed real estate professionals.
Q: I’m interested in selling my business. How do I determine it's value?
A. There are entire books written on this subject, so I’ll try to be brief. Generally, it’s a multiple of the net discretionary income. A highly desirable business with a long track record of profitability will warrant a higher multiple and value. The challenge is determining net discretionary income. That process involves reconstructing the profit and loss statements of the most recent 3 year period to determine how much net income the business is actually generating. Once that number is calculated, an appropriate multiplier is applied. A miscalculation of net discretionary income or a misapplication of the multiplier can have a significant effect on the value. Valuing a business is not an exact science, but an experienced business broker can help you with this process.
Q: How does the amount of rent paid by a tenant affect the value of a property?
A. When you lease a building, the tenant has the right to occupy the building during the term of the lease. When you sell the building, the new buyer buys the building subject to the rights of that tenant under the lease. You can create value by virtue of the rent paid, or you can decrease value. Many owners make a big mistake by leasing space to marginal tenants that pay marginal rent. That reduces the value of the building when the owner decides to sell. If selling is in your plans, be sure to discuss any potential lease situation with a knowledgeable commercial broker.
Q: I'm looking to lease a location for my business and don’t know where to start. Any ideas?
A: You should consider hiring the services of an experienced commercial broker to seek out properties for your consideration. They could find locations and make contacts with other brokers if necessary. You would work with just one individual and they would negotiate a lease on your behalf. This would save you time and expense.
Q: I’m interested in selling my building. Should I consider seller financing?
A. The answer is, it depends. It depends on the quality of the buyer, the amount of down payment, the credit rating of the buyer and many other considerations. Under most situations, seller financing is a common and acceptable way to sell a property. The other consideration is, should the seller financing be provided by contract for deed or purchase money mortgage? These are two distinctly different methods and both have pluses and minuses. In a contract for deed, title stays with the seller. In a mortgage, title passes to the buyer, subject to a security interest by the seller. This is a complicated question and should be discussed with a real estate professional.
Q: When selling a business, how do you maintain confidentiality?
A: When a buyer inquires about a particular business we have for sale, we require them to sign a Non Disclosure Agreement (NDA). The NDA specifically prohibits a potential buyer from disclosing the identity of the business and financial information. In most cases, it is critical to maintain confidentiality. The seller needs assurances from the buyer that they will not disclose certain information to outside parties that could adversely affect the seller’s business. There are legal consequences if the agreement is violated. We also conduct a short interview to determine if the potential buyer is qualified to buy the business. For obvious reasons, financial information is made available only to qualified and serious buyers and not to the general public.
Q: I signed a lease on a building and wanted an option to buy. The agent suggested a right of first refusal instead. What is the difference?
A: Many people think an option to buy and a right of first refusal are the same. They’re not. An option to buy sets a predetermined price and allows you to buy the property and compels the owner to sell the property at that price during the term of the lease. A right of first refusal gives you first chance to buy the property, if and only if, the seller decides to sell it. If the seller receives an offer, he would be required to give you first chance to buy the property at the price that was offered. In either scenario, you would need to be in full compliance with all of the terms and conditions of the lease before you would have these rights.
Q: I've owned a business for many years and would like to sell it. How do I start the process?
A: Assemble a 'team' of professional advisors that would represent your best interest in the transaction. Your team should include an experienced business broker, an attorney and a CPA. There are many considerations in the sale of a business and each professional would lend their expertise. You may want to consider a 1031 exchange which would allow you to defer the tax. You may also consider a Contract for Deed to provide a long term annuity. This 'team' approach helps to insure all of the considerations are handled professionally and that your sale will be consummated smoothly.
Q: I’ve heard the words “cap rate” used in valuing investment properties. What exactly is a “cap rate”?
A: It stands for capitalization rate. Essentially, a cap rate converts income into a value. A property’s net operating income is divided by the cap rate and the resulting number determines it’s value. This calculation is very simple. The problem is arriving at the appropriate cap rate. Differences in cap rates can change a property’s value dramatically. Even a 1/2 % difference in the cap rate can be significant. Many factors go into determination of this rate. Type of property, current interest rates, risk and other factors need to be considered.
Q: What is a letter of intent and why is it used?
A: A letter of intent is a preliminary agreement bewtween a buyer and a seller or landlord and tenant outlining the basic terms of the sale or lease. It is the basis for the preparation of a mutually agreeable purchase agreement or lease and is a way to expedite a written understanding between the parties without incurring a lot of expense.
Q: Do all real estate agents offer the same services?
A: No, they do not. Some agents specialize in residential real estate and others specialize in commercial real estate. The expertise required in each specialty is very different. No one can be an expert at everything. Most agents realize they don’t have the expertise or experience to handle an assignment outside of their specialty and will refer the assignment to someone who does. Generally speaking, if you’re selling a home, list with a residential agent. If you’re selling a commercial property, list with a commercial agent. That way you can rest assured you are getting the best service possible.
Q: Why aren't more commercial properties marketed on the MLS?
A: The MLS is a proven marketing tool for residential real estate. Nationally, the majority of homes are sold through the cooperative efforts of MLS members. In marketing commercial real estate, however, the focus is geared to a more targeted buyer and a national network. There is a much smaller pool of buyers for a commercial property and much more effort is required to attract a commercial real estate buyer. An exclusive commercial real estate company with national exposure, like our company, offers that type of service. Buyers of commercial real estate search web sites exclusive to commercial real estate and typically not ones where the primary focus is on residential properties.
Q: Why do selling fees vary so widely from company to company?
A: Generally speaking, the reason fees vary so widely is because the level of services provided varies from company to company. A real estate company that provides a minimal amount of marketing and expertise will generally charge much less than a full service company that provides national marketing and many years of experience. This is true with all professional services, not just real estate services. Real estate fees are like most things in life - you get what you pay for.
Q: The buyer of my property got turned down for financing and the deal didn't close. Am I free to sell my property to another buyer?
A: The easy answer seems like yes, go ahead. But not so fast. You should first effectively cancel the previous purchase agreement. Even though you didn't close as planned, you could still have a 'live' purchase agreement with the previous buyer. To be safe, I would first extinguish any rights the previous buyer may have to the property before entering into an agreement with another buyer. You and the buyer should sign a cancellation of purchase agreement. What if you didn't cancel the first agreeent, signed a purchase agreement with another buyer and the first buyer called you back and said he now has financing and expects you to honor his deal? Obviously, there would be a problem. It’s alwaysbetter to be safe than sorry.
Q: I hear people talking about a Net and Gross lease. What are they talking about?
A. A gross lease means the monthly rent payment includes everything; rent, utilities, real estate taxes, insurance, maintenance, etc. The term net lease has different variations, from net to absolute net. With a net lease the tenant pays, in addition to rent, a portion of the operating expenses of the building, typically the real estate taxes. With a double net lease the tenant pays both the taxes and insurance on the building. A triple net lease has the tenant paying all of the operating expenses of the building. An absolute net lease has the tenant paying all operating expenses, including structural maintenance and replacement. This type of lease is reserved for long term credit tenants.
Q: I sold my building by contract for deed and the buyer has missed the last two payments. What should I do?
A. Selling a property by contract for deed is very common and acceptable. The problem is, what happens when the buyer doesn’t make his payment? In Minnesota, cancelling a contract for deed is governed by statute. It takes 60 days to cancel the contract after the buyer is personally served with a cancellation notice. To reinstate the contract, the buyer must pay any past due amounts, cost of service, legal fees and 2% of the delinquent amount. The statute is very specific, so be sure to consult with an attorney to make sure the notice is drafted properly.
Q: What’s the difference between a contract for deed and a mortgage?
A. There are significant differences between these two financing methods. The preference between the two methods depends on whether you are buying or selling. If you’re buying, you may prefer a mortgage, as the foreclosure process is longer and there is a right of redemption. This will give you a longer time period to cure any delinquency if you get behind on payments. If you’re selling, you may prefer using a contract for deed. If the buyer gets behind on payments, the cancellation period is much shorter and you can recover the property much quicker. These are important considerations and should be addressed by a knowledgeable real estate professional.
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