Prospecting For Commercial Real Estate Listings

When you prospect in commercial real estate sales or leasing situations, you will meet with and will talk to many people on a daily basis. The more people you do this with the better. Prospecting is critical to your business growth and listing processes in any market.

It is interesting to consider what prospecting situation you find yourself most often in. The answer is different for everyone as each person has communication preferences and methods of approach that works for them over other standard approaches. It is therefore most important to prospect in the way that suits your character and business style.

Your daily prospecting method should be the thing that works for you and gives you the best results and could be any or all of:

  • Telephone
  • Door to door
  • Networking events
  • Referrals
  • Face to face contact

In all respects the prospecting and meeting process will be enhanced if you refine it and use a small number of statements that gain the attention of the prospect. We call these statements ‘Prospect Value Statements’ (PVS) and they must relate to you and your commercial or investment real estate market.

Prospect Value Statements

The ‘Prospect Value Statement’ is one of a kind and should match you, your business, and your focus. It should clearly declare and communicate the fundamental reason why your organisation exists and why you’re selling or leasing commercial investment property from the prospects perspective. It is the most important thing that you can learn and use in commercial real estate. That being said, it is amazing how many salespeople in commercial real estate do not master the concept and some never even know about it. The PVS is such an important statement to your conversion process that we will spend time now on it in helping you design your own.

So why is the PVS so important? It succinctly, clearly, and precisely defines what you do and how you do it in commercial real estate. Better still, it does so in a way that your clients and prospects can see and know why they should do business with you. The PVS will tell them that you are better than the competition agents in the market.

The PVS plays a role in just about every business opportunity and prospecting situation that you come across.

Sample of a Commercial PVS

‘We assist our commercial investor clients in the industrial market at Salisbury to find new tenants that match their investment plan or cash flow expectations, and therefore enjoy a more stable occupancy. We do this by canvassing all tenant changes in the region for the coming 3 years and directing deals to the desirable tenants at the right time for our clients.’

Sample Structure of a PVS

‘We assist our commercial clients (companies, tenants, or investors) in the … industry (or business, or market segment, or location) to … and enjoy … We do this by …’

To make this work, it’s important for you to know and really understand what end result benefit you actually deliver to your commercial real estate prospects, customers and clients (be they landlords, tenants or investors). You also need to know exactly what benefit your prospects or clients actually want to gain, enjoy, achieve, or have in this market. Your PVS is matched to the end user of your services at all times.

‘Your PVS will also change over time as it will have relevance to the current market conditions and the pressures that your prospects need resolved.’

So What Results and Benefits do Prospects Need?

Before you start to create a PVS or a series of them for you and your business, let’s define some of the results and benefits that are typical desired outcomes for a client or prospect in a commercial real estate sale or lease situation. Consider your market. What are the priorities of the prospects that you deal with today?

Commercial Real Estate Lease situations:

  • Stable tenant
  • Good rent
  • Long lease
  • Major tenants
  • Quality tenants
  • Ability to refurbish
  • Make good obligations
  • Growth of rent
  • Stability of rent
  • Sound lease document
  • Resolving vacancies faster

Commercial Real Estate Sales situations:

  • Quick sale
  • Higher price
  • Confidential sale
  • Method of sale
  • Faster settlement
  • Good enquiry
  • Good promotion and marketing
  • Comprehensive market coverage
  • Sale to investors
  • Sale to owner occupiers

Given these benefits and your market trends now in your location, you should be able to easily construct a series of PVS models that suit the prospects that you deal with. Ideally you should be able to quickly call on 2 or 3 of these statements in any prospecting conversation to match the needs or interest of the prospect you are talking to.

Pop Quiz Commercial Real Estate Investing

I read once that if you took all the real estate lawyers in Illinois and laid them end to end along the equator – it would be a good idea to leave them there. That’s what I read. What do you suppose that means?

I have written before about the need to exercise due diligence when purchasing commercial real estate. The need to investigate, before Closing, every significant aspect of the property you are acquiring. The importance of evaluating each commercial real estate transaction with a mindset that once the Closing occurs, there is no going back. The Seller has your money and is gone. If post-Closing problems arise, Seller’s contract representations and warranties will, at best, mean expensive litigation. CAVEAT EMPTOR! “Let the buyer beware!”

Paying extra attention at the beginning of a commercial real estate transaction to “get it right” can save tens of thousands of dollars when the deal goes bad. It’s like the old FramĀ® oil filter slogan during the 1970’s: “You can pay me now – or pay me later”. In commercial real estate, however, “later” may be too late.

Buying commercial real estate is NOT like buying a home. It is not. It is not. It is NOT.

In Illinois, and many other states, virtually every residential real estate closing requires a lawyer for the buyer and a lawyer for the seller. This is probably smart. It is good consumer protection.

The “problem” this causes, however, is that every lawyer handling residential real estate transactions considers himself or herself a “real estate lawyer”, capable of handling any real estate transaction that may arise.

We learned in law school that there are only two kinds of property: real estate and personal property. Therefore – we intuit – if we are competent to handle a residential real estate closing, we must be competent to handle a commercial real estate closing. They are each “real estate”, right?

ANSWER: Yes, they are each real estate. No, they are not the same.

The legal issues and risks in a commercial real estate transaction are remarkably different from the legal issues and risks in a residential real estate transaction. Most are not even remotely similar. Attorneys concentrating their practice handling residential real estate closings do not face the same issues as attorneys concentrating their practice in commercial real estate.

It is a matter of experience. You either know the issues and risks inherent in commercial real estate transactions – and know how to deal with them – or you don’t.

A key point to remember is that the myriad consumer protection laws that protect residential home buyers have no application to – and provide no protection for – buyers of commercial real estate.

Competent commercial real estate practice requires focused and concentrated investigation of all issues material to the transaction by someone who knows what they are looking for. In short, it requires the exercise of “due diligence”.

I admit – the exercise of due diligence is not cheap, but the failure to exercise due diligence can create a financial disaster for the commercial real estate investor. Don’t be “penny wise and pound foolish”.

If you are buying a home, hire an attorney who regularly represents home buyers. If you are buying commercial real estate, hire an attorney who regularly represents commercial real estate buyers.

Years ago I stopped handling residential real estate transactions. As an active commercial real estate attorney, even I hire residential real estate counsel for my own home purchases. I do that because residential real estate practice is fundamentally different from commercial real estate.

Maybe I do “harp” on the need for competent counsel experienced in commercial real estate transactions. I genuinely believe it. I believe it is essential. I believe if you are going to invest in commercial real estate, you must apply your critical thinking skills and be smart.

POP QUIZ: Here’s is a simple test of YOUR critical thinking skills:

Please read the following Scenarios and answer the questions TRUE or FALSE:

Scenario No. 1: It’s Valentine’s Day. You are in hot pursuit of the love of your life. A few weeks ago, she confided in you that all she ever dreamed of for Valentine’s Day was that her lover would show up at her door, dressed in a white tuxedo with tails and a top hat, and present her with a beautiful bouquet of flowers. You’ve rented the tuxedo, but now you are concerned about how much money you are spending.

TRUE OR FALSE: Since flowers are pretty much all the same, it is OK for you to skip the roses and show up with a bouquet of fresh yellow dandelions.

Scenario No. 2: For several years you eyesight deteriorated to the point where you can barely see your alarm clock. You are now considering corrective eye surgery so you won’t need glasses. Your sister-in-law had corrective eye surgery and has had spectacular results. She recommends her eye surgeon, but mentions the cost is about $5,700 for both eyes and that the surgery is not covered by insurance. A few years ago, you had surgery to correct your hemorrhoids and it cost you only eight hundred bucks.

TRUE OR FALSE: Since surgeons all went to medical school and are all medical doctors, you are being frugal and wise by asking the surgeon who performed your hemorrhoid surgery to perform your corrective eye surgery.

Scenario No. 3: Several years ago, when you first got married, you asked a former classmate who is a lawyer to represent you in the purchase of your townhome. The cost was only $375. A year later, you started a family and decided you needed a Will. The same attorney prepared Wills for you and your wife for a total cost of $700. You started your own business and your attorney friend formed a corporation for you and charged you only $600 plus the cost of the corporate minute book. Years later, when your son was arrested for misdemeanor reckless driving, your attorney friend handled the criminal case and got your son off with supervision for only $1,500.

Your business has been successful and you have built a pretty sizable nest egg, but you are tired of working for every dime and want to try investing in real estate. You have your eye on a strip shopping center. It includes a grocery store, bank, hardware store, dry cleaners (on a month to month tenancy), a couple of fast food restaurants, a gift shop, dental office, bowling alley (with a lease about to expire), and wraps behind a gas station/mini-mart on the corner. The purchase price is $8,000,000, but the net operating income looks pretty good. You figure if you turn the bowling alley into a full service restaurant/banquet facility, and convert the dry cleaners into a 24-hour coin laundry, the net operating income will increase and the shopping center will turn into a spectacular investment. You plan to pull together much of your life savings and put down $2,000,000 to buy this strip shopping center, borrowing the balance of $6,000,000. You remember that your lawyer friend handled the purchase of your home several years ago, so you know he handles real estate.

TRUE OR FALSE: Commercial real estate is the same as residential real estate [Hey, its all dirt, isn’t it (?)], so you are being a shrewd businessman by hiring your lawyer friend who will charge much less than a lawyer who handles shopping center purchases several time a year. [What is this “due diligence” stuff anyway?]

ANSWERS:

If you answered “TRUE” for any of the foregoing Scenarios

STOP!

The Quiz is over.

Please find a quite place to reflect upon your life and consider whether the decisions you make consistently give you the results you desire.

If, on the other hand, you understand that the answer to each of the foregoing questions is FALSE, I am available to help you in Scenario No. 3.

For Scenario No. 2, you should follow your sister-in-law’s suggestion and contact her eye surgeon, or some other eye surgeon with equal skill.

For Scenario No. 1, you are on your own. [But, if you answered TRUE for Scenario No. 1, you may be FOREVER on you own.]

Investing in commercial real estate can be profitable and rewarding – but it requires good critical thinking skills and competent counsel.

You have a have a brain. It is strongly recommended that you use it.

Commercial Real Estate Investment – Basics

Commercial real estate investment is the natural progression from residential property investment. Experienced property investors tend to move into commercial real estate sooner than later – and for very good reasons.

Once your portfolio grows you will find it very difficult to manage your investments if a large portion of them is tied in residential properties. Imagine if you have $15 million worth of residential properties. That will be a lot of homes and tenants to take care of.

On the other hand $15 million will buy only a very small number of commercial properties that will be comparatively easy to manage with much lesser overheads.

Commercial properties include offices, industrial sheds, free standing retail shop, bulk retail, block of shops, medical centers, service stations, motels, hotels, back packers, health clubs, churches, funeral parlors, child care centers, car yards, convenience stores, shopping malls, to name just a few. Each type of commercial real estate investment has its own peculiarities, strengths, problems, rewards and risks.

The return on investment in commercial real estate is much higher than residential property.The income is net and not gross because the tenant pays all the out going expenses. The income is also more stable because of the long leases.

It is typical to have returns of around 10% net for a commercial real estate investment and any where from 7% to 9% net return for a prime property.

The value of a commercial real estate to a great extent is determined by the quality of the lease. In general the value is determined by taking net contractual rental being paid and use of a capitalization rate to arrive at a value. The value is also determined by the quality of the tenant and length of the lease.

The value of a commercial property can drop substantially if it becomes vacant. I have seen commercial properties being sold at less than half their value if they are difficult to lease.

Commercial property management is also much simpler because tenants have a strong vested interest to maintain the property to a high standard. Tenants usually derive their income from the property. They have to keep the property looking good and maintain functionality to impress their clients.

I have seen tenants spend hundreds of thousands of dollars to make improvements to the property. Most of these improvements stay with the property long after the tenant has left the property.

Real estate law is more flexible towards commercial lease contracts. You can virtually word and add any clause that is agreeable to the contracted parties. It is common to charge penalty interest on the out standing rent or lock the premises on continued default of rent.

By far the biggest risk in commercial real estate investment is finding a new tenant in case of a vacancy. In commercial real estate the requirement of each tenant in terms of size, location, use and rent payment capacity is so different that it is very difficult to get the right tenant for the right property.

For the reasons mentioned above it is also difficult to sell a commercial property investment. Higher the value of property there are lesser number of investors to buy the property. A commercial property investment is less liquid than other investments because there are very few players in the market. For a residential house there will be hundreds of potential buyers which is not the case with commercial properties.

Commercial real estate investments are generally sold on capitalization rates and rarely on replacement value. It is therefore possible to purchase a poorly rented commercial property well below its market value. You can also increase the value of your commercial real estate simply by raising the rents during rent reviews or re-negotiating the lease terms when it come up for renewal.

The funding for commercial property investments is harder to get as banks look at the quality of tenants, length and terms of lease. They will typically fund a maximum of 50 % to 66% of the market value of the property. The lending rates are also marginally higher. You will therefore need more equity to buy. This reduces your leveraging power to buy more property.

Commercial real estate is where professional investors put their energy because of the higher returns and ease of managing them. For these investors commercial property is their ‘bread and butter’ and they drive their speculative income by trading in residential properties.

Some commercial investors focus their attention to improve and add value to their commercial portfolio. Whilst others use their rental returns to fund development projects that show much higher returns but need different and more advanced skill sets.

Commercial property investing is very rewarding but requires more knowledge, experience and capital out lay. It is advisable not to jump into commercial real estate from the very out set until and unless you have the knowledge, very deep pockets and risk taking ability. It is advisable to start with residential real estate investment to build your equity and cash flow.

You should buy at least 8 to 10 residential investment properties before venturing into the world of commercial real estate.