In far more than a handful of recent deals involving all kinds of commercial properties and Cape Cod businesses, the buyer has been someone the seller knows or is affiliated.

Most often this association is rooted in an existing business, landlord-tenant or employment relationship. In many other instances the buyer just happened to be an adjacent property or business owner.  In business sales, an amicable deal with a competitor or supplier has brought some others to the closing table.

It appears these deals are being struck as private “off-market” transactions suggesting the phrase, “When you’re ready to sell, let me know.  I may be interested,”  is paying off for many motivated buyers.

Naturally, the primary reason why these buyers are particularly motivated is the synergistic benefit the opportunity typically offers. Since the property or business is familiar to the buyer, the lower degree of pre-purchase due diligence can be an added incentive. Bankers seem to be willing to warm up to these types of transactions as well. For some, dealing direct and the potential to save on transaction costs are often perceived as another mutual benefit.

Despite what appears to be a favorable outcome, there is some downside to selling to someone you know under a private transaction.  

First, whether a business or property sale, choosing not to expose the opportunity to the open market will limit the chances of obtaining a maximum price and optimum terms which would otherwise be achieved through competitive bidding among multiple buyers. 

Second, experience has shown that private sales tend to begin with some general conversation on the topic and then quickly ramp up from there. Absent proper planning and pricing this can put both parties in an awkward and sometimes untenable situation where they eventually ask, “How did we get here and this fast?” 

Sound financial planning, legal and valuation assistance is the best hedge against these risks. 

For motivated commercial property and business sellers looking to privately transact with someone they know, the take away here is this:

The prospective buyer is likely to have a unique benefit to leverage and a solid familiarity of your business or property. And to be confident you are striking the right deal, be sure to first obtain proper financial, legal and valuation assistance.

Joseph P. Egan is a MA Certified General Real Estate Appraiser with over 25 years of professional valuation experience. Through a specialization in commercial real estate and closely-held businesses, since 1991 he has completed over 600 appraisal, brokerage and consulting assignments concerning all types of commercial real estate assets and going concerns located on Cape Cod, Nantucket, and Plymouth County, MA. Clients served generally include attorneys, banks, corporations, developers, investors, and owners of closely-held and family businesses. Prior to relocating to Cape Cod, Joe worked in the New York Metro Area and throughout CT with leading regional and national appraisal firms such as Cushman & Wakefield. Please contact Joe here.

I thought it would be interesting to see how this anecdotal alternative has measured up recently by comparing recent Cape Cod commercial property sale prices with their respective assessed value. The data sets included sales prices from 93 transactions completed between January 2008 and June 2008 and their Fiscal Year 2008 assessments. The properties sold were located throughout all areas of Cape Cod. This is what the analysis revealed:

• Nearly 30% of the recorded sale prices were below the assessed value and the remaining 70% were transacted at sale prices above the prevailing assessed value.
• In 17.4% of the transactions, the sale price and assessed value fell within 10% above or below 100% of the assessed value.
• Among all transactions, sale prices were on average 128.5% higher than the Fiscal Year 2008 assessments. The median was 120.5% higher.

As the analysis shows, property assessments are often an unreliable proxy for establishing a reasonable price or market value of Cape Cod commercial real estate. The analysis doesn’t suggest the assessments are flawed or established superficially. Additionally, assessing professionals I have encountered throughout the region are among the most astute, capable and concientious practitioners I have encountered in my 25 years in the real estate business. What’s more, assessed values are established for a unique purpose incorporating special criteria, specific time frames and statutory guidelines.

In a market cycle where the number of Cape Cod commercial property sales are trending down, price levels are in a state of flux and property assessments provide inconsistent guidance, where do we turn?

In short, I suggest doing what always produces superior results in a challenging market: adopt a back to the basics mindset where there is no substitute for well developed, comprehensive market intelligence and a willingness to devote more time investigating and truly understanding key market nuances.

Rules of Thumb should not be considered synonymous with transaction data points or multiples derived from specific transactions usually reported by a party involved in an actual business sale such as a business broker or other intermediary.  

Although there may be some limited exceptions, the fact is while easy to apply and understand, valuing or making a purchase offer on any business by relying on a Rule of Thumb is not a good idea. There are several valid reasons why:

• At best, a Rule of Thumb is an anecdotal average and if applied across the board it tends to penalize the best performing businesses and reward the poor performers.
• In a related sense, although some massaging may be attempted, Rules of Thumb are fairly static and do not go far enough in accounting for variations from business to business. Examples of these key variations may include differences in customer and employee loyalty, lease terms, location, cash flow trends, supplier relationships, the nature and quality of the FF&E, and barriers to entry.    
• Reliably developing the correct income stream to apply against a Rule of Thumb can be tricky. If this important task is incorrectly developed and the Rule of Thumb is subsequently applied, it could very well be equivalent to a double mistake.
• Ray Miles, the creator of the largest and oldest business transaction database and founder of the Institute of Business Appraisers suggests using a minimum of ten data points or transaction multiples in valuing a business under a Sales Comparison oriented approach. How convincing is that single Rule of Thumb or tight range looking now? 
• A certain mystery surrounds Rules of Thumb. For instance, like urban myths, who actually creates them and under what circumstances are they formulated (based on completed deals or general expectations, cash or seller financed transactions)? And how do Rules of Thumb stack up against empirical transactional data? 

Whether you are a business owner or looking to buy a business, no doubt somewhere along the line a Rule of Thumb or two will be placed on the table. If you are inclined to partake, just remember to reach for and apply a little salt.

Here are three main reasons why: 

1. Even in real estate, first impressions are lasting. A smartly priced property will generate and maintain much more attention from the start.
2. A property priced too high often sends the wrong message, especially to a savvy buyer or cooperating broker actively seeking only sensible opportunities offered by serious sellers. The fact is most prospects initially operate in a cursory “know it when I see it” fashion and take then the time to dig deeper once their interested is piqued. Failing to develop the initial interest due to an unrealistic listing price could serve to make your listing a nonstarter.
3. Relying on a pricing strategy which employs a series of price reductions is generally not a good plan. To begin with, after each price change the task of making all interested parties (past and future) aware of the price change can be difficult. Multiple price changes can also send out the “only testing the waters” impression and that’s one fishing trip serious prospects are adept at avoiding. Lastly, many smart and well advised buyers routinely interpret successive price reductions as growing desperation on the part of the seller.

While not an exact science, setting your sights on the center of the pricing target is the best way to bring your commercial property to the market. For objective and reliable assistance in establishing a sensible list price for your commercial property and featuring your listing on CapeCodBusiness.com™, please contact me. Working together we can pool our resources and experience to help you get what you desire: getting to the closing table in the most optimum time frame with an agreement that makes good sense.

The Mill Stores warehouse and distribution facility located at 128 Breed’s Hill Road, Hyannis, MA recently changed hands. According to public records, the 27,000SF structure on 4.13 acres conveyed in early July 2008 for $3.7 million to RAM Construction LLC of Bedford, MA. The buyer was reported to be a F.W. Webb Co., a plumbing supply company with locations throughout New England.

The property located in Independence Park, between the Cape Cod Potato Chips plant and Breed’s Hill Condominium, is one of a few high bay and sprinklered facilities of this size on Cape Cod. The property also offers several truck height docks and a large truck parking area.

Those of us who have been here long enough to remember will recall this structure was originally built in 1989 by The Myers Furniture Co. for use as their warehouse and distribution facility.

Certainly recent prices paid for similar Cape Cod commercial properties will always be relevant indicators. However, the most important thing to remember about real estate prices — like cherished school photographs taken in early September and eventually passed on to relatives months later at Christmas – much can change in between! Since real estate transactions often take many months to consumate, report and be acknowledged by the marketplace much can and will change in between. It’s no wonder real estate prices are what economists call a classic lagging indicator. Couple this fact with the forward thinking and “not at real time” nature of real estate markets, the inherent limitations from an over reliance on price levels are apparent. 

In a market cycle where the number of commercial real estate sales are trending down, price levels are in a state of flux,  and the supply of available properties is abundant, it’s no wonder the real estate market is an imperfect marketplace.

But given the current scenario where do we turn, beyond price levels, for more answers in this imperfect or unstructured marketplace? In short, I suggest back going to the basics where greater reliance is collectively placed on four additional key market indicators:

1. Contract prices for properties currently under agreement.
2. Regularly updated figures on transaction volume with demand ranked by property sector.
3. Familiarity with sensibly priced comparable listings with a sharp focus on the number of days-on-market, any history of price changes, and possibly the number of showings and feedback.
4. Most importantly, obtaining from a reliable source the who, what, where, when, how and why surrounding any pending or closed transaction. Sources may include the Buyer or Seller, an attorney, broker, tenant or other party.  And in the current tight credit market, consider the perspective of a trusted local commercial banker to be invaluable.

Clearly seeing the big picture beyond price levels, understanding all the moving parts and applying sound investigative skills will separate you from the pack in the coming market cycle. Over reliance on one piece of information such as price levels is essentially reaching for the low hanging fruit and a sure sign of hanging on to 2004-2007 market thinking. The times (and the market), they are a changin!

According to a SEC filing completed by the REIT in the same month, the real estate only transaction included a portfolio of 18 commercial bank branches, branch bank/offices and operation centers located throughout Southeastern MA and Cape Cod. Together the properties comprise 121,000 square feet of Gross Building Area (GBA). The sale price equated to about $272 per square foot of GBA, including associated transaction fees and closing costs.

Rockland Trust will be the sole tenant at each property and the total annual base rent for all 18 properties is just over $2.3 million. The terms for each lease are fully net and the base terms range from 10-15 years, not including four concurrent renewal options. The average base rent for all 18 locations is $19.05 per square foot as set forth in the SEC filing.

According to the Form 8-K filing the six Cape Cod branches located in Centerville, Chatham, Hyannis, Orleans, South Yarmouth and West Dennis, total almost 27,000 square feet of GBA and conveyed for $9.121 million. The collective sale prices for the six Cape Cod properties accounted for about 28% of the total acquisition price and equated to $338 per square foot of GBA. The average base rent per square foot for the Cape Cod locations was also higher than the portfolio average based on the transaction information reported to the SEC.

Rockland Trust acquired the Cape Cod properties in 2000 following the divesture of Fleet branches after its merger with BankBoston. The most recent real estate only transaction did not include all Rockland Trust properties located in Southeastern MA and Cape Cod.

The number of sale-leaseback real estate transactions involving national and regional banking entities has increased in recent years. In mid 2006, American Financial Realty Trust acquired a portfolio of 236 Citizens Bank and Charter One properties in a $317 million sale-leaseback deal. The 2006 transaction also included selected branch locations on Cape Cod. As investors such as REITS continue to be attracted to quality net leased opportunities and more banks seek to tap the equity in these prime assets, sale-leaseback transactions are likey to continue in the banking sector.  

Independent Bank Corp. (NASDAQ: INDB) the holding company for Rockland Trust Company, provides commercial banking, retail banking, and investment management services in Massachusetts. Rockland Trust has a network of 61 retail branches, ten commercial lending centers, five mortgage banking centers and four Investment Management Group offices all located in Southeastern Massachusetts and Cape Cod. The growing community bank founded in 1907 and headquartered in Rockland, MA has $3.3 billion in assets. 

In March 2008, Independent Bank Corp. acquired Slade’s Ferry Bancorp, parent of Slades Bank. The transaction added nine new Southcoast MA branches to the Rockland Trust franchise.

Number of Transaction Continues Declining Trend

The number of commercial real estate transactions recorded on Cape Cod, MA through April 2008 was 25.4% lower compared with January-April 2007. This recent downshift follows a 39.3% drop in the first four months of 2007 and was the second largest decrease since 2000. Although notable, the lower YTD 2008 decline suggests the softened demand is moderating. Between 1999 and 2008, the median January – April change in the number of individual transactions was -10.6%.

While most sectors reflected comparable year-to-year demand levels, the recent decline was clearly at the expense of softening in the commercial condominium and vacant land sectors. Total YTD 2008 transactions were evenly distributed in each of the four months with a favorable burst in month end closings experienced in April.

Gross Sales Up Boosted by Investor Acquisitions

Despite the slide in property closings, total YTD 2008 commercial property sale prices reached $85.2 million which was nearly $28.0 million higher than the level achieved in the same period in 2007. The January-April 2008 total commercial property sales volume represented about 9.5% of the total stated value (greater than $50,000) reported by the Barnstable County Registry of Deeds for all property sales in the same period. 

Boosting the total dollar volume was the higher number of investment property acquisitions which included two net leased CVS pharmacies, two shopping centers and a reported sale of Bass River Marina in West Dennis, MA. Collectively, these five sales gave the market a $42.8 million injection. A solid and proportionately higher percentage of $1.0 million plus commercial transactions completed by able funded buyers kept the YTD 2008 dollar volume at a favorable level as well.  

The Take Away

Transaction levels may well continue to erode but less precipitously. Investors and well capitalized cash flow buyers will continue to pattern the national trend toward a flight to quality. Limitations on the available supply of assets of this caliber, including attractive sale-leaseback deals will be an issue for buyers. Owners of quality assets, however, will likely be in a good position to respond to this demand trend.