Commercial Real Estate Frontline

Now that the froth has disappeared into the rear-view mirror the the task of selling a commercial property has changed. We’re getting back to a more normal market (albeit contracting more than we’d like) which means a balance of price and terms. For a time sellers could dictate both of these, but no more.

Price and terms are traditionally a balancing act, and so they are again. If price is your primary objective when you’re selling then its important for you to consider what you’re willing to give up in return. One strategy we’re seeing creep back out from the shadows is Seller Financing. In a market where debt is more difficult and more costly to obtain than it has been, seller financing can be just the sweetener you need for your deal.

The Wall Street Journal reported today that even large institutional sellers are turning to “taking paper”.

As shopping-center owner Developers Diversified Realty Corp. negotiates to sell stakes in 13 malls, it has enlisted a deal sweetener that hasn’t been used for years: It offered to finance a portion of the purchase price.

Developers Diversified isn’t alone. Seller financing, associated mainly with small real-estate transactions, is playing a role in more large deals as capital from traditional sources has become scarce.

For the independent investor this can be even more attractive. In a recent multifamily sale negotiation we saw a buyer increase his offer by 5% if the seller would accommodate his financing request (which was offered at market rates and terms).

In an environment where any returns are favorable and capital preservation is key, this financing option should be considered by sellers who are having a difficult time attracting buyers or by those sellers for whom price is the primary goal. Some benefits to seller financing (properly constructed) include:

• A potentially higher selling price
• Monthly cash-flow
• Having an investment secured by a familiar tangible asset
• Deferred capital gains taxes

Seller financing doesn’t work in every situation, but for sellers with equity who understand the risks involved, seller financing can be just the ticket. Always have an attorney draw up the mortgage. Always qualify the buyer financially.

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