by Prince Licaylicay | Mar 13, 2024 | All Articles, Selling
Phoenix, Ariz (February 28, 2024) —
Source From: https://realestatedaily-news.com/
Commercial Properties, Inc./CORFAC International (CPI)
Arizona’s largest locally-owned commercial real estate brokerage, is pleased to announce the sale of Building F in Venture Court Professional Plaza in Anthem, Arizona. The ±27,223 SF two-story office building is located off I-17 and Anthem Way at 41810 N Venture Drive. The property has excellent visibility from I-17 and is just 6 miles from one of Phoenix’s recent developments, TSMC, the new semiconductor manufacturing plant, whose surrounding area has the potential of becoming its own thriving business center.
Eric Butler and Phill Tomlinson at Commercial Properties Incorporated represented the seller, Liftable Media, Inc. Keith Lammersen of JLL represented the buyer, Maricopa County Libraries. The ±27,223 SF office building was sold to Maricopa County Libraries for $9 million ($330.60 PSF).
Butler commented, “North Valley Regional Library was originally on the campus of Boulder Creek High School in Anthem where they were leasing space and open to the public and the students on campus. We had to help Maricopa County Libraries change the CC & R’s (Covenants, Conditions, and Restrictions) in the development so they could occupy the property. We were happy to be involved throughout the process and the previous owner was delighted with the outcome.”
Even after outlining all the information above, determining when to sell your commercial real estate (CRE) can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
by Prince Licaylicay | Jan 7, 2022 | 1031 Exchange, All Articles, Buying, Investing, Selling
If you’re like most real estate investors, you’re continually assessing your portfolio to see if you are spending your money well. That involves exploring your real estate choices to determine if you can extract your value and reinvest in a more successful investment vehicle.
You may realize this equity in your assets in one of two ways: selling the property or refinancing with cash out. But which is better for you: Selling your property and performing a 1031 exchange or refinancing the project and pulling your money out?
What is 1031 Exchange?
A 1031 Exchange, otherwise known as a like-kind exchange, is a swap of one investment property for another. Kind transactions allow real estate professionals to grow and diversify their portfolios, with limited federal income tax implications. To qualify under Section 1031, there must be an exchange of real property held for the productive use in a trade or business or for investment solely for property of a like-kind to be held either for practical use in a trade or business or investment. It is a mode of asset appreciation on the exchange wherein the payment of tax is not eliminated but merely deferred until a later point when the taxpayer eventually sells the property received in the exchange.
What is Cash Refinancing?
A cash-out refinancing refers to a mortgage financing option where an old mortgage is replaced for a new one with a more significant amount than owed on an initial load, thus helping borrowers use the difference to procure some cash. In real estate, financing generally refers to replacing an existing mortgage for a new one that typically extends more favorable terms to the borrower. By refinancing a mortgage with a new one, you may be able to have potential access to cash, decrease the monthly mortgage payments, negotiate a lower interest rate, renegotiate the periodic loan terms, remove or add borrowers from the loan obligation.
Advantages of a 1031 Exchange
- Low minimum investment and flexible investment amounts. Because multiple people are investing in the same asset, the minimal investment on a TIC property is usually lower than you might expect. In addition, since tenants own the property in a shared ownership agreement, each owner can maintain a different interest in the property. Moreover, the amount you can expect depends wholly on the size of your ownership, i.e., the larger the size of property owned, the larger the return and vice versa.
- Higher potential for diversification and safety. Given that the safety barrier to the investment is lower in a TIC property, this fact offers many investors the chance to diversify their portfolios and invest in multiple properties. This, as a consequence, makes each investment secure since it lessens the likelihood of incurring significant losses.
- Access to higher-quality real estate. Since people tend to pool their money for investment purposes, the TIC investor often has access to higher quality real estate than they would afford if they invest in the same using their own money. This also opens up an opportunity to attract tenants with higher levels of income.
- Greater ease of ownership. Since the property has multiple owners, it means that there will be various hands that would be able to take care of the day-to-day operations and the management of the investment property. So while you may be able to pull your weight investment-wise, the amount of work you are expected to do is less than the work you will do if you own the property on your own.
Disadvantages of a 1031 Exchange
- Shared risk means shared rewards. It should be noted that sharing a portion of the risk for investment purposes also requires you to share any rewards from it as well. For example, the portion of any rental income you receive will only be a portion of the whole, which is smaller than what you would usually receive if you were the sole investor. The reason behind this is that whatever profit you might earn is shared with your co-investors.
- Little potential for unilateral decision-making. Undoubtedly, having co-owners also takes away your right to make unilateral decisions regarding the property. In addition, the IRS Revenue Ruling 2002-22 provides that a vote must take place before any major decisions may be made. Therefore, if you are not the type of person who does well in group decision-making, this type of investment may not be for you.
Advantages of Cash-out Refinance
- Lower interest rates. A mortgage refinances usually offers a lower interest rate than a home equity line credit/home equity loan. A cash-out might give you a lower interest rate down the line, especially if you would have bought your property when mortgage rates were much higher.
- Debt consolidation. Utilizing the money from a cash-out refinance to pay off interest-bearing loans that give high interest could save you thousands of dollars of interest. This is because Cash-out refinancing typically offers lower interest rates than you would have paid if you bought the property.
- Higher credit score. Paying off your credit card in full due to a cash-out refinance will eventually build a positive credit score from the banks where you procured the loan. This reduces the credit rationalization ratio, i.e., that ratio the banks use to determine whether to lend you money or not, as well as the amount of credit available for you to use. Therefore, the higher the credit rating, the more money the banks are willing to lend you.
- Tax deductions. Mortgage interests may be utilized as a deduction to the total amount of tax you will pay. In addition, this interest may be available on a cash-out refinance if the money will be used for the purchase, building, or the substantial improvement of your home. All of these interest expenses may be deducted from the total amount of tax due, which will benefit the taxpayer.
Disadvantages of Cash-out Refinance
- Foreclosure risk. There is a foreclosure risk because your home is used as collateral for the mortgage. There is, therefore, a risk of losing your home if you cannot make prompt payments. Therefore, if you are doing a cash-out refinancing, always make sure that you are promptly paying your credit-card debt; otherwise, you run the risk of the possibility of losing your home because of the non-payment of the debt in due time.
- Closing costs. The new mortgage will have different terms from the original loan. So, always make sure that the interest rates and fees are double-checked before agreeing to further terms and conditions. Otherwise, you will be exposed to risk because of ambiguous, extravagant closing costs that you could not take note of before closing the agreement or agreeing to new terms.
Refinancing a 1031 Exchange Property: Before and After
The mechanics of refinancing in 1031 transactions before exchange are relatively simple. The taxpayer pulls cash out of the relinquished property from a lender. This lender uses the equity in the property as collateral. Then, the taxpayer sells the property, pays off the loan, and then reacquires the debt on the purchase side of the exchange. The debt must be reacquired; otherwise, the taxpayer will have to pay tax on the cancellation of the debt. If the aforementioned process goes down without a hitch, the financial advantage is this: The taxpayer has pulled cash from his equity without triggering any tax liability. This will be even more advantageous if the new debt on the purchase has a lower interest rate than the refinance loan.
Furthermore, some tax experts feel that refinancing the replacement property after the exchange is preferable to refinancing the relinquished property before the exchange. In any case, you should think about the dangers and talk to your tax expert about your objectives.
CONCLUSION: If you want to sell your property and generate income with a low minimum investment and flexible investment amounts, or if you’re going to have a higher potential for diversification and safety, but shared risk means shared rewards, or if you’re going to have a limited ability to make unilateral decisions, then a 1031 exchange is for you. On the other hand, cash-out refinancing is the most fantastic option if you desire lower mortgage interest rates, the chance to combine your debt or a good credit rating.
Even after outlining all the information above, deciding whether to go for a 1031 Exchange or a Cash Refinancing can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your business and investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on your 1031 Exchange? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
by Prince Licaylicay | Dec 22, 2021 | All Articles, Selling
There are many factors to consider when deciding when to sell your commercial real estate (CRE) property. Let us start off by saying that it should not be an impulsive or overnight decision, unless extremely necessary. It takes time, research, discussion, and reflection in order to come up with a decision that can generate profit to you as a CRE property owner.
The good thing is there are ways to assess whether it is time to let go of your property. This article will discuss the ways of determining a great time to sell your CRE property, and tip the odds in your favor.
When Property Income exceeds Sales Price
There are two significant values you need to determine when deciding when to sell your CRE property: the projected income your property can generate and your sales price. In order to identify whether your CRE property is viable for a potential sale, the projected property income must be able to exceed your sales price.
This is to ensure your potential buyers that your property generates a substantial amount of income more than the offered sales price. This is definitely a standard deal-breaker among investors whether to buy your property or not.
For instance, if a CRE property is projected to earn a property income of $6,000,000.00 while being sold for $5,000,000.00 based on market value, then this makes the property viable for sale since it estimates an immediate $1,000,000.00 advantage to the buyer.
On the other hand, if the property is projected to earn $5,000,000.00 but is being marketed for a $6,000,000.00 price as per the market value, then it is better for you, as the property owner, to hold the property for a little while until the numbers turn to your favor.
In identifying these metrics, you need to prepare the proforma of financial statements presenting the following values:
- financial projection of a commercial real estate property’s income
- operating expenses
- net operating income (NOI)
- cash flow
- capitalization rate (Cap Rate)
- internal rate of return (IRR)
- equity multiple
- cash on cash return
When market conditions reduce potential continued returns
Immediate sale profit vs. continued income
As a CRE owner eyeing to sell your property, it is crucial to study your current market, which includes the demographics of your competitors and potential buyers, the standard vacancy and interest rates in the general market and within your area, and the population of occupancy of your property’s market. Remember that market trends fluctuate through time and when research tells you that now is not the right time to put your property for sale, then you better trust the numbers.
With this data at your disposal, it will be easier for you to calculate another two important values to help you determine whether it is the right time to sell your property: its potential return upon selling and the projected property income when you keep the property.
Comparing these two, while analyzing it with your current market trends, will help you answer the question, “Is it more profitable to sell this asset now or will it generate a more steady income if I keep this for now?”
With that, you can determine when it’s high time, or not, to sell your property.
Decrease in annual return vs. total operating costs
Another thing to do is to calculate the total annual operating costs versus the annual property income. When the required percentage to efficiently sustain property operations is not met, consider selling the property before its value continuously drops.
For instance, if a CRE property requires a steady 20% annual return to maintain the facility and provide ample income to the owner but a study of the finances reveals that the facility only generates 10% annual return, then selling the property is a better option, considering a bigger chance of lower profit in the future.
Whereas, if the CRE property owner projects potential rent increase in the near future as per market standards as a result of varied factors and believes that people are more likely to continue leasing, then keeping the property can generate bigger continued profit as compared to the possible immediate sales profit.
When identified prospect buyers become competitive
Different buyers, different needs and motivations. That is what you need to remember when putting your CRE property in the market for sale. With this being said, there are particular buyers who are eager to pay more for your property based on their immediate needs, so knowing them puts you in an advantaged position.
Bigger companies with expanded spans of coverage can willingly pay more for your property as compared to local business owners, if they identify your property as the one they want. Furthermore, a business owner with an urgent demand for a space can shed more money to secure the spot as compared to a regular business owner settling for your sales price.
Therefore, knowing your potential buyers and creating competition among them is a huge advantage that can help you leverage your sales price, consequently increasing your profit.
From the three points mentioned, finding the perfect time to sell your CRE property all boils down to market research. Knowing the current market trends allows you, as a CRE property owner, to make data-based projections and calculated decisions. Knowing your competitors and your prospect buyers gives you knowledge on how and where you can better position your marketing, sales price, and identifying your eventual buyer. Take note that if you want bigger profit and better deals, you need to track, analyze, and trust the numbers. It is your responsibility to monitor the market since numbers are going up and down constantly.
Finally, you don’t have to work on it by yourself. There is a reason why commercial real estate brokers are in existence, and you must hire one to have access to expert opinions on real-estate matters and in securing better deals for your property.
Even after outlining all the information above, determining when to sell your commercial real estate (CRE) can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
by Prince Licaylicay | Dec 14, 2021 | All Articles, Selling
So, let’s say you have a commercial property and you want to put it up for sale. The problem is however that you’re not exactly sure the best process of determining the value of commercial real estate (CRE) properties. Given the fact that most CRE projects are larger deals, much thought should be given so that responsible decisions can be made. We suggest beginning with the first, most basic, yet significantly important action: valuing your commercial property for sale. The fact of the matter is that valuation for commercial real estate is fairly different from the valuation of residential properties. There are added intricacies and heightened value which makes the process of valuation rather complicated.
There is certainly a right way to value your commercial property if you are planning to list it to get the best deal possible. The goal is to find the approach that becomes the most advantageous for you. Therefore, becoming acquainted with the different approaches of valuing commercial properties is a “must” and reading this article should give you an edge over these matters.
Knowing your choices
Below, you will find some of the popular approaches used in valuing CRE properties. Identify which ones will be the most suitable to use in valuing your commercial property for sale.
The Sales Comparison Approach
This is also referred to as the “market approach” – for the rather obvious reason that this method involves looking into what is called the comps or recent sales data. Sales comparison is the most essential data used in this kind of approach; however, it is not often as easy to find. As this approach is more commonly used in the valuation of residential properties and when it comes to commercial real estate valuation, one might need to look outside of the market area for like-kind comparables, demographics, access to infrastructures, leasing trends, and all other relevant information to make a more reliable comparison. The good news is there are many property intelligence or artificial intelligence-powered data platforms that are specifically intended for use in the commercial real estate industry. Appraisers or investors, such as yourself could easily and quickly have access to opportunities in any market and be able to uncover strategic insights which could ultimately result in valuing your commercial property effectively.
The Cost Approach
Since some assume that informed buyers are less likely to spend more on commercial properties than they could on acquiring land and consequently building the same property from scratch—or what is referred to as “costs to build new”, the Cost Approach is therefore born. Here, the cost to rebuild the property from scratch is calculated. By further definition, this type of approach accounts for the current cost of the land as well as costs of construction materials plus labor and more that is supplementary to replacing existing structures of the subject commercial property. The cost approach uses a very simple formula where the property value is derived from the value of the land added with the “cost to build new” and the accumulated depreciation. You may find this approach is not used very often, however, when your commercial property for sale is located in a lesser active market with data needed for all the other approaches is not as easy to collect, you may find this approach most suitable for you.
The Income Approach
The Income Approach is up on the popularity scale. This appraisal technique is most frequently used in valuing commercial property. Based on how much income you expect a particular commercial property could be making or generating in the future, this approach requires you to be familiar with Net Operating Income (NOI) and Capitalization Rate (“cap rate”). The NOI is based on the net income generated by a property minus the operating expenses before capital expenditures, debt service, and taxes come in. As for the cap rate, this refers to the ratio of the net operating income of a value on a particular property. This is used to express the anticipated Return On Investment (ROI) of the property owner for a year prior considering the capital costs, taxes, and debt service. Finding the value of your commercial property for sale using the income approach means using the formula Value = NOI/Cap Rate. While this approach may be highly popular, consider the fact that this can only be most accurate if you take caution on the inputs because miscalculations of rents or underestimations of vacancy rates, for one, could put the numbers in the result significantly inaccurate as well.
The Gross Rent Multiplier Approach
If you are looking for a simpler alternative approach to valuing your commercial property, then the Gross Rent Multiplier approach could be suitable for you. This gets the job done quickly and can give you a rough estimate of the value that you are looking for. To compute the value using the GRM, you will need to be familiar with the formula “Property Value = Annual Gross Rents x Gross Rent Multiplier“, where the property that generates an annual gross rent (rental income) is multiplied by the gross rent multiplier giving you the property value you need for your commercial property for sale. Note that the difference between this approach and the income approach is that here you will use the gross income rather than the net income in calculating the value of your property.
The choice is yours to make
To sum it all up, what can be derived from the different approaches presented is the fact that valuation is driven by information – how much data you collect would have to be how much relevant valuation you could make. Bear in mind that some expert appraisers often use more than just one approach whereby taking an average of these approaches for them to determine the most significantly accurate value for the property. It could only be tough the first time. Assuring enough, the more you can get past this learning curve in making appraisals, calculating for such becomes easier the next time.
Even after outlining all the information above, valuing your commercial property for sale can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your CRE investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
by Prince Licaylicay | Dec 7, 2021 | All Articles, Buying, Investing, Selling
Commercial real estate (CRE) property prices are influenced by many factors. Price drops or price increases among these properties may be predicted once these factors are analyzed, which include Supply and Demand, Demographics, Location, Interest Rates, Economic Situation, Government Policies, and Global Shifts.
Supply and Demand
Supply and Demand are two of the most basic concepts in the economy. These factors influence several aspects of the economy, most especially real estate properties. The theory of supply and demand in Economics states that if the demand increases while supply decreases, prices will increase; whereas when demand decreases and supply increases – prices will drop.
If there is a large number of investors looking for commercial real estate (CRE) properties but there are not much buildings, prices will increase. Similarly, when there is a huge supply of buildings but only few buyers, the CRE property prices may probably drop. However, this is still reliant on other factors, as well.
Demographics
This factor is often overlooked but is very crucial in determining CRE property prices. Demographics refer to the characteristics and composition of the population, such as age, income rate, civil status, race, gender, and population growth. The characteristics of the population will influence the kinds of businesses to be built, what businesses will boom, and the prices of CREs. Major changes in the demographic characteristics will greatly affect businesses and CRE prices for years, or even decades.
For instance, is the trend among millennials opting to have 2 or less children. Using this trend, investors, developers and businesses will try to accommodate the needs of this small family.
Location
It is already a given that the location is one of the most critical factors affecting CRE properties’ market value. Different locations mean different demographic characteristics, which would also mean different needs. Furthermore, the location where the property is situated can either detract or add potential investors. The access to amenities, such as power lines and transportation will affect the demand for the property.
Crime rates and doubtful businesses will detract investors. Unpleasant neighbors will also scare off potential buyers. CREs around this area will most likely lower down their value for them to get an offer. On the other hand, low market value of CRE may be the result of sketchy businesses coming into the neighborhood.
It is safe to say that cheaper prices are not always the best option.
Interest Rates
Interest rates also have a major impact on the CRE property market value. Interest rates of CRE loans fluctuate. This is a crucial matter especially when you are the one putting up your property for sale. If banks decide to increase the interest rates for loans, it is a possibility that mortgage lenders will also follow.
Higher interest rates mean higher mortgage payments. This is a huge turn-off for most. Whereas, when interest rates are low, potential buyers may increase because of equally low mortgage payments.
Thus, when interest rates are up, CRE properties are less attractive which would force them to lower their market value. Consequently, when interest rates are low, CRE properties are more attractive, which would mean a higher market value.
Economic Situation
The economy may be favorable to some businesses, but not to some. This situation, unfortunately, is outside of anyone’s control but the government.
But you can analyze the economy and check if it is working on your side for you. You can check the health of the economy by examining the economic indicators: Gross Domestic Product (GDP), employment data, the prices of goods, the manufacturing activities and so many more. Generally, when all of these indicators are down, so will real estate properties. If this is the case, you might want to hold and sell your property only when the indicators rise back up.
Government Policies
Government action and legislation greatly affect the demands and prices of commercial real estate properties. It can impact CREs through tax credits, deductions, and subsidies. These policies can temporarily boost the demand for real estate properties until they are withdrawn.
However, the decline in GDP and other economic indicators may opt for the government to increase taxes from other businesses to keep the economy afloat. This will definitely negatively affect CRE property prices.
Therefore, being aware of the current government policies, legislation, and programs sure is an advantage. It can help you determine the changes in the supply and demand of CRE and identify false trends in the economy.
Global Shifts
The contemporary world suggests that when you make business, you must not focus only on your community but for a global scope. Entrepreneurs are connected despite the geographical proximity. When a country’s economy spirals down, one must also look into the possibility that it may affect their business. Take note that your products do not come from one country alone, and when one country’s economy is down, you should also look at the economic indicators of your country. The effect may not be immediate, so it would be best when you look at the trends from time to time.
Pandemics can also greatly impact the demands for real estate properties. For example, the COVID 19 pandemic made major changes in work and school arrangement. Majority of the population practiced working from home. It greatly made an impact on the demand for commercial real estate.
Another global shift to take note is the boom in online shopping platforms. Physical stores are no longer necessary. Customers are buying straight from the warehouse and shipped directly to their homes. This can negatively impact CREs.
So, will commercial real estate prices drop?
There is no definite answer to that. This is a changing world. Trends may continue to evolve. Government policies and programs also adapt to these changes. Furthermore, the economy is a cycle. It may drop now due to the innovations and current events, but it will rise back up, just like how the world overcame the great depression. The key to better anticipate these price fluctuations is to be well-informed of the current situation and of the factors listed above to know the market value of your property.
Even after outlining all the information above, investing in CRE can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your business and investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
by Prince Licaylicay | Nov 24, 2021 | All Articles, Buying, Investing, Leasing, Selling
In a leasing project, it is likely you will come across a Letter of Intent (LOI). In this article, we have rounded up everything you need to know about a Letter of Intent.
A Letter of Intent (LOI) is a written non-binding document between two parties that serves as the basis for a contemplated future agreement. It is a preliminary agreement that is negotiated between a tenant and landlord or buyer and seller. The Letter of Intent stipulates the dominant economics and key points with proposed terms in a lease agreement. They are designed to describe or draft the essential items that both parties can assess to decide whether to proceed or continue to an official contract. Thus, a letter of intent is a nonbinding document that encapsulates the basic terms of the offer and the initial goal of the parties without the extensive legal norms included in a real estate contract. This gives the seller or the landlord a concise picture of the scope and terms of the real estate purchase or lease agreement. It is rather important to note that a letter of intent could be binding if the parties decide that it is binding.
When is LOI used in real estate?
A letter of intent is submitted by a serious soon-to-be tenant, buyer, or representing broker in a commercial real estate transaction as an initial offer. It is planned based on basic preparatory information furnished by the landlord as well as the introductory due diligence of the property. Negotiations and formal due diligence begin after the Letter of Intent has been conveyed and prior to a formal purchase or lease agreement is entered into. It is not infrequent for Letter of Intents to be submitted and agreed upon, only to have the terms and conditions subsequently changed or even withdrawn altogether. This is so because a Letter of Intent, at its core, is a nonbinding document that merely states the buyer’s intent subject to verification and due diligence, all of which can be amended or changed any time.
A letter of intent is used in commercial real estate to put the major points of a proposed lease into writing. The party submitting the letter of intent should research, inspect, or even tour available properties on the market before submitting a letter of intent to the landlord. Generally, a letter of intent will be drafted by a commercial estate broker representing the buyer or tenant after the inspection or tour of the property and conducting a spontaneous discourse or conference with the owner or landlord. The Letter of Intent will, therefore, serve as a vehicle to outline the key points of the deal, such as but not limited to: (a) the rent; (b) due diligence period; (c) financing; and (d) the close of the escrow date or date of possession.
And while a letter of intent is a non-binding document, the act of furnishing one certainly demonstrates that the buyer or tenant is committed to moving forward on a deal and intends to advance in good faith the deal. However, there are instances where a party may change the terms of the Letter of Intent or even withdraw from the deal altogether based wholly on desired terms not being agreed to, new information after performing due diligence and after verifying information provided by the parties.
All in all, a Letter of Intent is used to convey the key points of the parties from the lease price to the close of the escrow date or date of possession. To this end, the potential tenant must be diligent in researching or inspecting the properties since new information may serve as a basis for continuing or even withdrawing from the potential deal. In the same vein, the landlord must likewise be diligent in taking care and preserving its properties so that potential lessors will not be discouraged.
What is the importance of the Letter of Intent?
A letter of intent is one of the essential documents in commercial real estate leasing/buying. This is because buying, selling, or leasing commercial real estate is, most often than not, a tedious, convoluted, and costly process even to the most experienced investors and tenants. Hence, a Letter of Intent guides the parties to ensure that they have a meeting of the minds or that the contract conveys what they genuinely intend before going into the intricacies of contract making regarding leasing commercial real estate.
A letter of intent will serve as a stepping stone between introductory discussions with the property owner and the drafting of a legally binding lease contract. The Letter of Intent serves as a modality for the parties to put their key points and provides them with a quick and easy way to familiarize themselves with the basic terms of the proposed transaction. This is crucial before negotiating the contract terms and before paying a real estate attorney to draft or review a lease agreement.
Likewise, letters of intent are an excellent way for the landlord to determine who the prospective tenant is. Furthermore, making a letter of intent does not entail any costs; hence, a prospective lessee or buyer may submit as many Letters of Intent as possible, expecting that at least one is accepted. However, suppose the terms of the prospective lessee significantly deviate from that of the property owner’s. In that case, this could be a tell-tale sign that such prospective lessee submitting the Letter of Intent may not be a good fit for the owner to move forward with or be serious about completing the proposed transaction.
What are the contents of an LOI?
A Letter of Intent generally includes:
- The parties: (a) the name of the tenant; (b) the address of contact information; (c) the party authorized to execute a final sales or lease agreement.
- The property: (a) the address and the suite number of a lease of the negotiated lease; (b) the building description including lot size and square footage; (c) Type of rent, whether Full Gross Service (FSG) or a Triple Net Lease including any Common Area Maintenance (CAM).
- The offer: (a) The lease price as well as any down payment thereof; (b) Due diligence period and general description of documents that the landlord will provide; (c) Lease Terms, including rent and any annual increase; (d) rent abatements or tenant improvements; (e) length of lease; (f) target for signing the purchase contract or lease agreement; (g) Expiration date of the Letter of Intent.
- Any Disclaimers: (a) that the Letter of Intent is not binding, and any (b) preconditions in signing the lease.
How To Write an LOI
The typical structure of a Letter of Intent is as follows:
- Introductory paragraph. The preceding paragraph serves to describe the purpose of the LOI, such as your interest in leasing the property;
- The parties to the proposed transaction. This includes entities which are involved, the legal and home state to reduce the risk of the wrong information being used in the lease agreement;
- The key points in the deal. This includes the description of the property, the terms of the offer, and the disclosure of any commercial real estate brokers involved in the lease transaction, as well as any other key terms and conditions specific to the proposed transaction.
- The Closing Paragraph which includes whether or not certain parts of the LOI are binding, a non-disclosure agreement of confidentiality clause, remedies for breaching any binding provision in the LOI, as well as a request that the party receiving the LOI to sign and return a copy thereof proper to the expiration date of the LOI.
Conclusion
A letter of intent is a non-binding document that serves as a guiding light for the parties before entering into any formal lease or purchase agreement. It details the key points the parties want to convey to the other party to the end that they would have a meeting of the minds. Furthermore, considering the letter of intent is not binding, it is not infrequent that the offer may be withdrawn before the commencement of the formal agreement.
Even after outlining all the information above, writing a letter of intent (LOI) can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help locate commercial space for lease and assist in using a letter of intent to land such space. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
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Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
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