00:00With the uncertainty that permeates the media these days, many may be wondering if now is a good time to sell their commercial real estate.
00:13After all, interest rates are roughly double what they were just a year ago, rabbit investor appetites have moderated, world turmoil persists and there is in again some rumbling the economy could recede later this year.
00:30Remember, you heard it here first in January. I believe we'll avoid a recession, but I digress. To the question of the day, is now a good time to sell?
00:43My answer is, it depends. Allow me to expand. In the universe of sellers there exist three types. Equity, non-equity and distress.
00:54Daylight appears between the market price of a property and any debt owed in an equity situation.
01:00The reverse is the case in a non-equity circumstance. However, not all non-equity sellers are in distress, and some distress sellers still have equity.
01:12A property owner with equity views their situation as an, I don't have to sell, situation. However, is their equity earning the type of return it should?
01:25I spoke to a private investor last week. He's owned and operated an industrial property since he bought it in 1998. He owes very little, which means he's sitting on a large pool of equity.
01:41He's facing a maturing mortgage. He can refi the underlying debt, pull out some cash and the property will still provide income after the mortgage is serviced.
01:54But is that the right move? With the rampant appreciation experience since he acquired the property and only moderate rent growth, the return on his equity is skimpy.
02:06When I explained what sort of return could be achieved by selling today and redeploying his equity via a tax-deferred exchange, he was intrigued.
02:18He can't sell for early 2020. Specifically, if more space is needed and the building will become excess, a decision to sell might be made.
02:28Because the proceeds will be funneled into the next buy, less emphasis is placed on extracting the highest dollar amount, there's more certainty of close.
02:46Those that purchased in late 2021 and early 2022 with 90% small business administration financing could presently be non-equity owners.
02:56With the price softening this year coupled with maximum leverage from last year, chances are no equity remains.
03:06An aggressive loan repayment or a rampant run-up in pricing can remedy the imbalance.
03:12Given this scenario, I'd suggest holding onto the property unless some distress appeared.
03:17In the non-equity example above, should a loan repayment be required, distress emerges.
03:27Now this owner may find his only recourse is to sell and at the best price attainable.
03:31In the non-equity example above, should a loan repayment be required to sell and at the best price attainable.
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