Every day, many quote requests come across my desk for pricing, and about 25% to 30% of them are commercial. When we review a commercial quote request, the question I most often have a sales rep verify is: “Was the sales price for the real estate only?”
Why the real-estate-only question matters
Why do we ask? Why should the broker ask the note seller up front? The answer is simple: it matters.
When we price commercial loans, we base our LTV solely on the value of the real estate. We do not count other business assets that may have been part of the sale, such as furniture, fixtures and equipment (FF&E), inventory or goodwill. The old saying holds true: we only care about “the sticks and bricks.”
Too often, the broker assumes the sale was for the real estate only. That assumption causes major problems later, when our value comes in low because the appraiser valued only the real estate.
I have seen cases where the broker said the sale was for real estate only, then sent us a file with a bill of sale and a security agreement showing the sale included not only the building but all its contents.
Property types that usually include more than real estate
How can a broker avoid this? Know your deal. Ask your note seller direct questions about the terms of the sale.
Some property types tend to include more than real estate in the sale:
- Motels usually include FF&E such as beds, TVs and dressers.
- Restaurants usually include inventory and FF&E, especially kitchen equipment, freezers and ovens, along with goodwill (the value of the business or its name).
- Any existing business. If someone is buying a going business, it’s a safe bet the sale includes more than the real estate.
Other commercial properties are usually real-estate-only sales, such as apartment buildings, office buildings, retail strip centers and mobile home parks. These are generally described as income-producing properties.
Get the right documents up front
Take the time at the start to think about what kind of deal you’re brokering, ask the right questions and get the proper documentation on the front end. You’ll have a much higher success rate on your commercial deals.
