Negotiating a commercial property purchase

Commercial property is hot all around the DFW Metroplex. Prime storefronts and other commercial sites are increasing in value very rapidly, making them attractive investments. In this climate, however, it can be difficult to agree on a value that satisfies both parties.

All potential uses for the property have to be considered for the valuation, regardless of what the investors might have in mind at the time. This is not only a consideration for potential future uses but also for competitors who might want to bid on the property in question. It’s important to understand all the uses of a site and why they are part of the negotiation process.

Performing due diligence

The primary considerations are always the building or open land itself. It starts with location, and in the case of commercial property that is influenced by access. It is near a highway? Is there a lot of traffic? Is it central to shoppers with a lot of disposable income?

The other considerations are the same as with any property. What condition is it in? What uses are permitted by zoning, and is there potential for future expansion? These are very important, and the due diligence has to be done to properly evaluate them.

Considering all uses

Even if you have a plan for a building, it is important to consider other uses  for the space. This influences not only the tenants you might have, but also how large of a pool of buyers you can count on at resale. This is very similar to the considerations that the seller has in mind, especially if there are multiple offers.

There are three types of buyers for commercial real estate:

  • Investors who buy a property for the purpose of renting it out to someone else
  • Businesses planning to be the tenant of the building themselves
  • Developers intent on redeveloping or otherwise improving the land or structure

All possibly uses influence the value of the building. Even if you intend for the property to house your own business, the redevelopment potential is important for the future price. You may not want to pay the premium that comes with a building with a high redevelopment potential, for example, if you intend to stay put for a long time.

Obtaining experience

For all of these reasons, it is vitally important to have someone with experience in all aspects of commercial real estate  as you negotiate a price. Proper due diligence is critical, but so are many considerations in the future that many buyers do not consider.

A thorough review of all potential uses of a site is important, reaching far beyond what you may ever plan for your own use. There is no substitute for expertise, especially in a hot real estate market like we are experiencing in Dallas today.