Selling commercial property: A complete guide

Anyone who’s bought or sold a residential property will know it can be hard to separate emotions from logic, particularly when it comes to the home you live in. But buying and selling a commercial property generally entails a more hard-headed approach.

If you’re wanting to put a commercial property on the market, you’ll need to have a look at the building’s income-generating appeal to gauge how it will be received by the market. In the commercial property sector, financial return can be a primary driver.

Here’s a step-by-step guide to selling your commercial property:

Before the property goes to market

Paperwork

• Get your documents in order: This means gathering all legal and financial information including documentation confirming current income, lease terms, tenant renewal options in place, and recovery of any outgoings (if applicable).

• Tick legal boxes: It pays to have your legal documents ready to go. These will include title information, registered survey plans, compliance certificates, relevant council building approvals, occupancy permits, fire safety compliance, etc.

• Assess tenant appeal: Gather evidence of tenant reliability in meeting rent payments and general financial profiles of tenant businesses to demonstrate future income stability.

• Clarify tax status: Commercial property sales can attract GST [Goods & Services Tax] although credits may be claimed on some purchases. A capital gain on a commercial property is also subject to capital gains tax (CGT) which may also attract concessions depending on ownership structure and when the property is sold. It’s best to understand tax consequences and how they may affect your financial affairs before you go to market. It may also affect the timing of the sale.

Ready the property

• Maintenance: As you would for any property going to market, attend to maintenance and presentation matters. This includes building wear and tear, grounds, and any value-add opportunities you deem may increase the price you could get on market.

• Property valuation: It pays to get a professional property valuation based on market data and net rental yields so you can get a good idea of market value. This will also help you set a realistic and achievable sale price.

• Line up your lawyer and accountant: Advise your lawyer and accountant you intend to put the property on the market and seek their advice on any other matters you may need to attend to before, during, and after the process.

How to boost the value of your commercial property

To improve the appeal of your commercial property, look at ways to boost its net operating income, including:

• securing longer term leases with existing reliable tenants before putting it on the market

• ensuring lease agreements include automatic annual rent increases linked to CPI or a set fixed percentage

• leasing out any vacant units or unused parts of the property

• weighing up the cost of extending or creating a new space that can bring in additional rental income

Going to market

• Timing: Commercial markets can be greatly affected by broader economic conditions, lending environments, and general business confidence. Do your market research to pick the best time for your circumstances, bearing in mind this may be subject to change relatively quickly.

• Research a reputable commercial agent: Look for an active local agent that specialises in commercial properties rather than a residential agent who sometimes puts commercial deals together. Ask other building owners or financial/legal advisors for any recommendations then check their recent sales history for your particular asset class - industrial, retail, offices, etc. Meet with them to gauge their market knowledge and whether they will be a good fit with you and your needs.

• Professional marketing: This can be done through an agent but sometimes it can be better value to commission high-quality photography (including drone shots) showing the property to best advantage, including aerial shots to highlight location, access to major routes, car parking, and extra facilities. Professional floorplans and site maps are also essential, as well as 3D renders to illustrate any proposed developments or site approvals yet to be acted on. Agree on a marketing plan with your agent that will reach potential buyers you are targeting.

• Choose the best sale option : Seek advice from the commercial agent and your own market research as to what is likely to best suit your target market and achieve the optimum outcome for your property. Choices include:

  • private treaty: setting a price and allowing buyers to make offers

  • expressions of interest (EoI): buyers are invited to submit confidential offers by a deadline which can work well for highly sought after or unique or unusual assets

  • auction: can work well in robust property markets by creating urgency and competition but effectiveness depends on timing and wide appeal of the property

  • off-market: this method may target a select group of buyers and can work well for properties where a clear segment of possible buyers is identified, or for more sensitive property transactions

Selling and settlement

• Negotiation: Selling a commercial property is not like selling a residential property. There may be far more negotiation involved regarding lease terms, due diligence time frames, possible leaseback arrangements, additional maintenance or repairs requested, or ensuring tenant rights. Have your documents in order. Your commercial agent and lawyer are best placed to advise you on particular negotiation points.

• Closing the sale: Once price and terms are agreed on, this should be handled by your solicitor or legal team.

• Tax obligations: This is where your prior advice on tax implications will pay off. The seller is legally responsible for paying the 10% GST to the Australian Taxation Office (ATO) on certain sales. However, in a standard contract, it is typically the buyer who funds this by paying the GST amount on top of the purchase price at settlement. There are some circumstances where GST is reduced and some tenanted commercial properties sold as ‘going concerns’ may be GST-free. Your accountant or tax professional is the best person to advise on your status and correct payment.

How long does it take to sell a commercial property?

Time on the market for commercial property depends heavily on:

• type of property (industrial, retail, office)

• location

• amenity

• demand

• scarcity

• general business and economic environment

• existing leasing arrangements of individual commercial premises

Commercial property settlements typically take longer than residential ones. While residential settlements are commonly between 30 to 60 days, commercial settlements can take from 60 to 90 days (sometimes up to 120 days, depending on circumstances).

This because they often involve more complex business leases that may be in place and require specialised commercial financing that calls for thorough assessment of the property’s financial credentials.