5 minutes
When a credit union decides to purchase or lease property for a new office, the search can be exciting. But the commercial real estate market is a bit like the Wild West: The rules are different in each market, and the players exhibit different abilities and alliances. In many cases, those players know each other from working in the same offices, partnering in development, and representing buyers and sellers over the years.
When your credit union is planning to buy, sell or lease, you are entering their world, so be certain to select the right guide. You need a realtor with the skills, reputation, history and connections to represent your credit union. Consider these questions when forging a realtor relationship to maximize the performance of your real estate portfolio and ROI:
Is the realtor you’ve worked with previously the right person for your next project?
If you want to sell your $12 million headquarters, for example, can this realtor maximize the price? Does he or she have experience in assembling a comprehensive presentation package that puts your property in the best light for three primary groups of possible buyers: investors, developers and owner/occupants? In selling buildings of this size? In presenting property to investment groups, via multiple listings, in contacting developers and in advertising? How will the market price be determined? How will the realtor go to market with your building? What fee for these services has the realtor proposed?
A typical fee for this type of sale might be 1 percent to 1.5 percent of the sale price; often the purchaser pays the realtor on its side of the deal. The realtor should provide a valuation based on comparable properties and estimated value to investors, developers and owner/users to help set the price. Then the property goes to market with the comprehensive property presentation and the initial asking price. The market sets the price as buyers make offers on your building, which may drive up the price by 10 to 25 percent, depending on location and market conditions. You need a realtor with strong market credentials, the capability to go head to head with other realtors and excellent negotiating skills.
If you’re buying, you can handle representation in several ways. You can pay a percentage of the eventual purchase price, which often equals .75 percent to 1.25 percent on a building in that price range; fix a dollar fee amount; or, in difficult market situations, pay an hourly rate per month that is then deducted from the fee when the purchase is completed. I have used the third strategy when working with realtors to reconfigure and right-size branch networks over time. They are motivated by the small cash flow to work continually to find the right lease sites and properties to purchase.
Does the realtor live in the market you need analyzed?
Does he or she have comprehensive on-the-ground knowledge and understand your strategic real estate objectives?
Does the realtor have any potential conflicts of interest?
Consider these examples:
- I was representing a client in Arizona. The realtor presented three options for relocation of a credit union’s headquarters. A bit of research revealed that his brother owned two of the properties, and the other was owned by an LLC in which he was a partner. There were many other options.
- In another case, five potential branch lease options were presented—all of which were owned by the realtor’s client.
- A headquarters building was priced and an offer received from the adjacent property owner who had partnered with the realtor to redevelop a string of properties. Replacing that realtor resulted in a 23 percent gain in price.
- A realtor purchased land and leased it to a credit union for a new building. Fifteen years later, the occupancy cost rose 200 percent.
Facilities are among CUs’ largest and least flexible expenses. The financial consequences of these decisions affect a credit union’s ability to invest in the future, so it’s essential to consider all the variables. I just completed a headquarters occupancy strategy where the eight options varied in 20-year cost by more than $30 million. Sound real estate strategies must be in place for the branch network out five to 10 years and for headquarters occupancy out 10 to 20 years.
It can be challenging to remain on strategy while on the real estate hunt. Realtors are motivated by two things: finding you the right property and closing the deal quickly. The latter motivation can get in the way of the former. A strategic branching plan will recommend market locations based on specific psycho-demographic characteristics and market trends. Site selection will be guided by a set of detailed location characteristics including market exposure, traffic generation, easy access, parking and beneficial neighbors. If the right site isn’t readily available, the board may be applying pressure to open branches or the realtor may be pressing to lease a specific site. Beware. A second-tier site will produce second-tier performance. Stick to your strategy even if it takes longer to realize.
Most of the realtors I have worked with are consummate professionals. They provide market information for the branching and headquarters occupancy plan, assist in the board presentation, strongly represent clients’ interests and charge a fair fee. The risks in real estate are too high to assume that all realtors are equal. Due diligence through the selection process, inclusion of your strategic planning consultant and adherence to your plans will help ensure optimized performance of your real estate portfolio and successful operations well into the future.
Paul Seibert, CMC, is principal/financial and retail design for CUES Supplier member EHS, a NELSON Company, Seattle.
