Creativity, Flexibility Key to Selling Industrial Properties Today

Scott MacLean, Vice President, NAI NBS

Many brokers who specialize in investment sales have not put any sales in escrow recently, and most institutional buyers have headed for the hills. So, what does it take to sell property in these tough economic times? Sellers need to remember two words: creativity and flexibility.

Buyers are out there. But to consummate a transaction, brokers must use all of the tools in their arsenals. Brokers also need to look at industries that are more recession-resistant. Brokers have applied these techniques in the last six months to successfully sell buildings in the Portland area that had previously languished on the market with little or no activity.

Leasing with a fixed option purchase price allows buyers to “try before they buy.” Oftentimes, lessees/buyers are able to negotiate fixed purchase options with a specific timeline in which to purchase the building. This strategy allows a potential buyer to move into a building and get situated before having to spend the money to purchase the building. The buyer has flexibility to purchase the building on his or her timeline, which can allow a buyer to shop around bank terms without the pressure of a short due-diligence period looming. This strategy also creates immediate cash flow for the seller, and can allow a seller more time to work on a 1031 exchange.

A recent win-win was at 425 N.E. Ninth Ave. The property had been on the market for quite a while. The lessee/buyer got the flexibility of being in the building, and using capital for improvements rather than the purchase price. The company has also been able to lease some of the extra space in the building.

The contract sale, a tried-and-true method used successfully by brokers during the 1980s, allows buyers to purchase a building without the hurdle of bank financing. In some instances, sellers are able to realize a higher purchase price if they are flexible on the interest rates or down payment. This can allow buyers with less than stellar credit to purchase a building and can significantly reduce the due-diligence period, expediting the entire transaction. Contract sales aren’t an option for all commercial buildings, but in certain situations they can be very successful.

Another strategy for large buildings that do not have much functional ease is to divide them into two or more sections that appeal more to owners/users. Not every user of industrial space needs a 100,000-square-foot building, just as not every homeowner desires a six-bedroom, four-bathroom house. The “sweet spot” in the residential market is a three-bedroom, two-bathroom house. Commercially, industrial buildings that cater more to users of smaller spaces can be very desirable. Again, splitting a building is not always possible, but it is one strategy a broker can use.

One recent example of this “condominiumizing” is Yeon Business Center Building 9. The building had been on the market for a year when it was split last fall to make it more marketable, and two different owners/users purchased the halves. The buyers were happy to find smaller spaces in the desirable Northwest Portland neighborhood, which is dominated by larger buildings. The sellers were able to sell the building quickly after it was split, and got a higher price per square foot than is typical of small buildings.

A reverse on the aforementioned strategies is the sale-leaseback, in which a business owner is able to raise capital for his or her business by agreeing to a fixed lease rate on the building and then selling that property to an investor. The sale-leaseback scenario is oftentimes more attractive than trying to raise capital in the more traditional ways of financing with a bank, etc.

Buyers are having difficulty obtaining financing today, and some sources that aren’t utilized as much in better economic times are becoming good resources. Buyers are turning more and more to Small Business Administration (SBA) financing to help reduce their down payments. While the SBA loan can be paperwork intensive, it does allow a buyer to purchase a building with only 10 percent down, making the dream of building-ownership available to more businesses. More businesses are also utilizing grants available through the Portland Development Commission.

Now is the time for real estate brokers and sellers to work together and look at all possibilities available in the marketplace. The seller that is waiting for “the perfect buyer,” who will offer the asking price with a short closing period, is a thing of a past – at least for the foreseeable future. These days, brokers will be tested on their creativity and sellers will be tested on their flexibility.