Let's talk about how to maximize your cash and minimize your taxes when selling. We meet hundreds of property owners every year who want to sell a commercial building, and I found, surprisingly, that many of them are very reactive in nature when it comes to selling their building. That concerns me, because you can double, triple, or even quadruple your after tax cash flow if you get strategic and create a proactive exit strategy.
Whether you are selling a business with real estate or just a piece of real estate, you need to think of your piece of real estate as a cash flowing business.
So how do I maximize the sale price?
Simple.
1. Increase the cash flow stream.
2. De-risk the property so the cash flow stream is more sustainable, predictable, and transferable.
Your sale price = Normalized Net Operating Income / Buyer's Cap Rate Normalized Net Operating Income is where the buyer will adjust your net income stream for things that will not likely continue into the future. This is where having a professional create a due diligence library for you prior to going to the market is so critical. Your job is to maximize the net income by filling vacancies and increasing rent/SF by increasing the value your tenant's get from the building and doing a better job of marketing the vacancies. You also need to find ways to control costs.
Here is how you de-risk the income stream.
Everyone talks about the income stream, but what most people don't talk about is the Multiple of that income stream that your building will sell for. That is the Buyer's Cap Rate. This is essentially the annual return an investor demands based on their perceived risk of the property. If your property income stream is more sustainable (longer term leases), predictable (better credit tenants, less fluctuations in rent), and transferable (professional 3rd party mgmt that will stay in place) then your buyer might demand a lower cap rate because your building is PERCEIVED as less risky. Ultimately less risk, means a lower cap rate which equates to a higher price. So if you're managing your own building, you should really consider having a 3rd party management company like ours take over a year or two before you plan to sell to increase your cap rate.
To give you an idea.
Self-managed might get you an 8% cap rate in our example and a 3rd party managed building a 7% cap rate. If your Net Operating Income is $100,000 the difference in price a buyer might be willing to pay just for that, since now out of area buyer's would be interested in a seamless transition, then you might get $1.48m for your building at a 7% cap, versus $1.25m for your building at an 8% cap rate. Think of it like this. An investor who sees your building as more risky because they would have to put management in place demands 8% annual net operating income would pay $1.25m for your building, and an investor who perceives your building as less risky might demand a 7% annual net operating income would pay $1.48mm for that same $100k income stream. That's a 14.29% increase in the selling price just by de-risking the income stream.
Let's break these down.
INCREASE THE CASH FLOW STREAM
Increase appeal to tenants
Flooring
Paint
Common Area updates
Exterior updates, especially ones people see when arriving at building
Fill Vacancies
Building should be stabilized at the new market rates prior to sale or you are leaving major money on the table.
Reduce normal operating expenses
LED Lights
Bulk vendor pricing
Ratio Utility Billing Services (RUBS)
Landlord expense stop
In conclusion, maximize your net income by filling vacancies and increasing rent. You can do this more effectively if you make your building pretty again and put measures in place that reduce operating expenses, particularly utilities and maintenance contracts. This is what we do for a living and we can manage, list, lease, or provide direction on how to renovate your building.
Schedule a free call here if you want to chat.
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