How to Sell Commercial Real Estate - Complete Guide
Despite being an invaluable asset, trying to sell commercial real estate intimidates the best of us with its mountains of paperwork, legalese, and potential risks. Selling commercial real estate isn't easy, and just one wrong step could mean losing millions.
But what if you could cut through the noise and sell smart, fast, and for top dollar?
Our comprehensive guide on how to sell commercial real estate will help you navigate every stage of the process, from recognizing market trends to increasing the value of your property, attracting top buyers, and getting the best sale possible.
TL;DR - Selling Commercial Real Estate
Selling your commercial real estate doesn’t have to be difficult; here’s how you can make the transaction quick, hassle-free and highly profitable:
Prepare your commercial property for sale
Determine the market value of your property
Create an effective marketing strategy
Negotiate the sale with potential buyers
Complete the closing process
It can be tedious if you don't have a strong team. So, we created Exitwise to help you hire the best M&A professionals and create the exits you deserve!
What Are The Different Types of Commercial Real Estate?
Before getting deep into the details of selling your property, let’s take a tour of the different types of commercial real estate. Remember: every category has distinct features, market dynamics, and exit plans.
That said, below are the five main types of commercial property:
These properties gain importance due to location convenience, including shopping malls, grocery stores, restaurants, and convenience stores.
High foot traffic and conspicuous exposure are essential for these properties, as they impact their value. Leases on these assets are frequently shorter; thus, maintaining optimal occupancy and rental income requires proactive tenant management and a sound awareness of consumer trends.
Industrial Real Estate
Industrial real estate comprises factories, warehouses, and logistical hubs and is essential to the economy. Its property value is predominantly based on easy access to transportation networks and proximity to key consumer markets.
Lease structures within industrial properties are highly flexible, supporting both standard terms and build-to-suit solutions that align with unique tenant demands.
This category includes co-working spaces, medical facilities looking for professional settings, and tall skyscrapers. The building’s age, types of amenities provided, and public transportation avenues greatly impact value in this market.
Because they provide reliable and steady revenue streams, long-term leases with well-established tenants are always in high demand.
In commercial real estate, multifamily properties—including apartments, condos, and student housing—offer a unique asset class.
Location plays a significant role in estimating their value, as does the mix of unit types and sizes (unit mix) and the availability of essential facilities (swimming pools, fitness centers, private garages, etc.). To ensure strong, steady ROI in this case, it's vital to focus on long-term tenant retention and steady occupancy rates.
Hospitality Real Estate
Last but not least, the hospitality real estate industry includes hotels, motels, and resorts. Brand recognition, strategic location, and distinctive features like spas or conference rooms significantly impact value.
However, revenue in this industry fluctuates often due to tourism trends and seasonal variances.
5 Step Process: Selling Commercial Real Estate
If you’re looking forward to learning how to sell your commercial real estate, follow our five-step plan for the best results:
Step 1: Prepare Your Commercial Property for Sale
Before listing your properties, we advise sellers to prepare thoroughly for a profitable sale of their commercial property.
Here’s the first step — arranging all mandatory paperwork that clearly shows your asset's ownership, legal position, and financial health.
What Documents are Needed?
Here is a list of paperwork needed for a smooth and successful commercial real estate property sale:
The title deed serves as indisputable proof of ownership.
Property tax receipts to prove your financial stability and help buyers avoid last-minute tax shocks.
Accurate, recent survey reports define the property's boundaries, size, and potential zoning restrictions.
Necessary paperwork ensuring compliance with regional laws and safety requirements.
Leases and tenant information (if any) showing current occupancy, rental income, and lease conditions.
Maintenance records to develop trust and simplify possible buyer due diligence.
Environmental reports that list all known hazards and/or completed evaluations.
Financial statements containing revenue, expenses, and Net Operating Income (NOI).
Step 2: Determine the Market Value of Your Property
Determining your property's exact market value gives you the power to negotiate, draw in potential customers, and eventually maximize your ROI.
But how does one decide on an exact figure, especially with so many variables at play?
How do I Determine the Market Value of my Commercial Property?
Here's an overview of the main approaches to consider:
1. Sales Comparison Approach
As per this method, start by looking at recent sales of comparable houses in the area. Seek out comparable properties with respect to size, location, kind (retail, office, or industrial), and occupancy rate of tenants. You can get a rough idea of your property's market value simply by comparing their selling price to yours.
2. Income Capitalization Approach
When following this strategy, focus on your property's potential for generating income. After deducting operational costs from gross rental income, you’ll find your NOI.
Divide it by a capitalization rate reflecting your property's risk and market conditions. The end result is an estimate of your property's market value.
3. Cost Approach
Last, this rare strategy evaluates the cost of replacing your property with a comparable one today. This includes accounting for the cost of building, the value of the land, and the deterioration of already-existing structures. While it is not typically utilized for income-producing properties, it can be helpful for one-of-a-kind or newly built assets.
Have a minute? Calculate your business’s current market value with our valuation calculator.
Step 3: Create an Effective Marketing Strategy
You need a clear marketing strategy to attract the right buyers for your business property.
Remember: you need targeted outreach that draws attention to your property's distinct value proposition for prospective investors—just flashy brochures and platitudes are a thing of the past.
How to Market a Commercial Property
Here's how to create a successful marketing strategy:
1. Know your target audience
Ask yourself - who are your ideal customers?
Are you selling to long-term investors looking for consistent returns? You may want to contact developers searching for redevelopment prospects or niche operators targeting specific industries.
Whomever it may be, find out what drives them, and customize your core messaging as needed.
2. Identify the major selling points
What makes your property unique? Is it a great location with first-rate facilities, appealing lease terms, or a robust tenant base? Narrow down on 3-5 major factors that appeal to your target audience.
3. Create engaging content
Create high-quality marketing brochures that highlight your property's USPs. Integrate virtual tours, in-depth property brochures, and expert photography in your content mix.
4. Promote ads on online platforms
List your property on major commercial real estate portals like LoopNet and CoStar. Connect with industry professionals/potential buyers on social media networks like LinkedIn. Make a landing page or dedicated website highlighting your commercial property's core qualities and advantages.
5. Develop a customized outreach strategy
Online listings can only do so much. Go the extra mile, contact brokers and investment groups specializing in your property type, and attend industry gatherings and conferences to network. If you have the budget, invest in strategic advertising in targeted newspapers or online platforms.
Step 4: Negotiate the Sale with Potential Buyers
So you've found eligible buyers, received offers, and narrowed down your options. Now comes the negotiation part, which is essential to maximize your profit and achieve an attractive deal. However, it can be stressful to negotiate the complexity of commercial real estate.
How to Negotiate When Selling Commercial Real Estate
Here are some pointers to remember while negotiating a commercial property deal:
Before you begin negotiating, determine your BATNA (Best Alternative to a Negotiated Agreement).
Leverage market data and your property's unique value to set a strong foundation.
Understand their goals and tailor your approach to capitalize on their specific needs.
Be assertive, present your terms clearly, and maintain a collaborative spirit.
Anticipate counteroffers and be prepared to negotiate, but protect your core principles.
Know your alternatives, and don't settle for a deal that undervalues your asset.
All of this will be quite difficult to execute without a dedicated team of experts adept at selling commercial real estate. We have helped multiple businesses find the best team for their M&A deals and can do the same for you. Book a call with us, and let's show you how.
Step 5: Complete the Closing Process
Want to ensure a seamless transfer of ownership? Closing on your commercial property sale includes the following procedures:
Pre-closing audit of all property-related contracts
Finalizing documentation (signing deeds, transfer documents, loan papers, tax forms)
Transferring closing funds to the seller's account
Giving the new owner the property keys
How Long Does the Process Take?
Depending on how complex the deal is, the closing process can take thirty to sixty days after an offer is accepted. Factors like banking arrangements, title issues, and unanticipated delays often influence these delays. The foundation of your M&A deal and the expertise of your M&A team might also affect the duration.
5 Tips for Selling Commercial Real Estate
Selling commercial real estate is not the same as selling a single-family home. So, before you put your commercial land for sale, take note of the following guidelines:
Know Your Market Inside and Out
Examine market trends, similar real estate transactions, and prospective buyer profiles in great detail. By using a data-driven strategy, you can identify suitable investors and establish a reasonable asking price.
Put Your A-Team at Work
Collaborate with an experienced broker, a knowledgeable M&A attorney, and a tax expert specializing in commercial property acquisitions. Their knowledge of legal issues, tax ramifications, and closing procedures ensures a seamless closing process.
Let us help you interview, hire, and manage your team of experts. Our hiring process is simple yet effective and gets you the best deal possible.
Improve Curb Appeal (And More)
Ensure your property is professional by maintaining new paint, manicured landscaping, and a clean interior. Invest in high-quality images and virtual tours highlighting the space's characteristics, including any roomy areas that need improvement.
Value Transparency and Diligence
Withholding information is a bad idea. Provide complete property reports, financial statements, and inspection disclosures to potential buyers at the outset. This builds trust and prevents last-minute shocks that could sabotage the deal.
Don't Be Afraid to Bargain
Granted, your first offer may serve as a springboard, but don't let go of your power too quickly. Create counteroffers by analyzing competitors and market data. A strong negotiator in your team unearths hidden value and gets you a highly profitable deal.
Selling Commercial Real Estate vs. Residential Property
While the principles of selling real estate remain the same, commercial and residential property deals are vastly different. Here are a few key differences to consider:
Commercial: Businesses lease space, increasing the diversity of their tenant pool.
Residential: Tenants are people or families who frequently need stable long-term housing.
Commercial: Long-term leases (3-10 years) are popular, providing consistent cash streams.
Residential: Shorter leases (12 months) are the norm, resulting in higher tenant turnover and vacant periods.
Commercial: Economic changes and industry trends considerably impact demand for specific property categories (e.g., office vs. retail).
Residential: Local factors such as population growth and job markets have an important role.
Commercial: There are numerous exit strategies available, including selling to investors, joint ventures, and even public offers.
Residential: The primary exit plan is usually to sell the property immediately and understand capital gains taxes and potential tax-deferred solutions beforehand.
4 Tax Facts About Selling Commercial Real Estate
Commercial real estate sales can be lucrative, but it's essential to consider the tax implications. Keep the following five facts in mind:
Long-term capital gains rates (0-20%) should be preferred over higher short-term rates (up to 37%).
If profit exceeds the depreciated value, depreciation recapture adds a 25% tax. Reduce taxes by holding longer or timing renovations.
State taxes differ; learn more about your state's rates and deductions for best results.
Since mortgage interest is frequently deductible, it somewhat lowers your tax burden.
How is Selling Commercial Property Taxed?
In the USA, selling commercial real estate is complicated by itself, with additional procedures to consider when dealing with tax implications.
The IRS wants a portion of your profits first. When you sell a business property you have owned for over a year, all earnings are taxed as long-term capital gains. Depending on your income level, rates range from 0% to 20%.
Longer property ownership typically leads to reduced tax rates. On the other hand, selling within a year results in short-term capital gains, which are taxed at your ordinary income tax rate (possibly higher).
Apart from capital gains, you’ll also be subject to other taxes, including depreciation recapture, state and local taxes, and transfer taxes, depending on the circumstances at hand and the land's history.
Frequently Asked Questions (FAQs)
Before we wrap up, here are some of the most frequently asked questions about how to sell commercial real estate:
Can I Sell My Commercial Property Without a Real Estate Agent?
Yes! While brokers provide valuable expertise, selling alone is also possible - especially for knowledgeable property owners.
Just be ready for more effort in marketing, negotiating, and law. Before deciding, reconsider whether it aligns with your time limitations, business complexity, and market familiarity.
How can I Enhance Appeal when Selling Commercial Real Estate?
Focus on your USPs: location, visibility, accessibility, prospective revenue, and tenant profile. Make sure the property is well-maintained and visually appealing. High-quality photographs and virtual tours work well in this case.
Next, use industry-specific platforms and events to target your marketing to the correct buyer pool. Consider offering variable terms or lease choices to attract more prospects.
As everyone knows, selling commercial real estate requires expert preparation and well-informed execution. While this comprehensive guide has provided valuable knowledge, remember that the M&A landscape is constantly changing.
Exitwise helps you interview, hire, and manage your M&A team and strives to increase your exit value. We'll simplify the process and aim towards fetching you the top dollar you deserve.
Talk to our advisors and sell your commercial real estate at the best price.