Business strategies and market conditions often shift, resulting in a need for organizations to realign their real estate portfolio with business goals. This is the act of real estate portfolio optimization, which is evaluating real estate assets and operations to discover efficiencies, lower costs, adjust strategy, and maximize value.
During the process, some assets may be identified as unsupportive, meaning they do not enhance key business objectives and no longer add value to your business. If the unsupportive asset is owned, the best approach to divesting (or, removing it from your portfolio) may be through a disposition process.
Through the disposition process, organizations rid their portfolio of any assets hindering growth, enabling companies to devote more attention and resources to CRE assets that are driving their business forward.
What Is Disposition in Real Estate?
In commercial real estate, the disposition process is the act of selling, subleasing, or conducting a lease buyout of commercial real estate property. It’s often done to monetize assets to reallocate funds into the company or pay off debt. In most cases, organizations sell off property because it is no longer relevant or valuable to their overall business objectives.
The 5 Phases of CRE Disposition Explained
While each organization may have its unique reason for entering into the disposition process, the process to dispose of unsupportive assets follows a common set of five phases.
Strategy and Initial Pricing
In the first phase of CRE disposition, the seller works with an experienced real estate broker to prioritize objectives (timing, financial goals, perhaps environmental considerations) and outline an initial disposition strategy. At the same time, the seller and their advisor must determine the unsupportive asset’s position in the marketplace and consider potential pricing that aligns with current market conditions.
The strategy and initial pricing phase of CRE disposition may include the following tasks:
- Collect available property data from corporate, internet research, and local personnel.
- Identify potential barriers to the disposition (zoning and deed restrictions, known/unknown environmental issues, functional obsolescence, etc.).
- Determine potential price, competitive properties, marketing time, market vacancy, and absorption activity.
- Determine potential for alternative/higher value use (such as an industrial warehouse that is located in a neighborhood that’s changing to multi-family residential).
- Contact economic development officials to explore incentives that may support a sale.
- Develop a tactical action plan in alignment with your business objectives.
At the completion of phase one, the seller should have a disposition strategy and action plan that clearly aligns with business objectives, a disposition timeline, and initial pricing estimates.
Due Diligence and Final Pricing
Once a disposition strategy is put in place, the seller enters phase two: due diligence and final pricing. It is during this phase that the seller must confirm the unsupportive property’s strengths and weaknesses within the marketplace, identify any property condition issues, and finalize the property’s pricing.
The due diligence phase of disposition typically includes:
- Facilitating property inspections and tours to identify strengths and limitations.
- Identifying the required property improvements to ensure market readiness.
- Evaluating data to confirm the agreed upon final price.
- If the property has barriers described above, collecting and understanding impediments to disposition, such as title, survey, environmental and physical condition challenges.
When working through a disposition with Allegro Real Estate Brokers & Advisors, you can expect to receive a property improvement list (to prepare the property for marketing) and a recommended listing price.
Marketing
The goals of marketing during CRE disposition are relatively straightforward: reach interested buyers through organized, targeted marketing efforts that align with the seller’s goals and objectives.
The marketing phase often involves:
- Analyzing market feedback and adjusting marketing strategy as necessary.
- Identifying prospective buyers and market test scenarios under non-disclosure agreements.
- Customizing marketing strategy based on outcomes of highest and best use scenarios.
- Using targeted advertising mediums, including print, web, and direct mail, to reach relevant decision makers.
- Addressing environmental issues, if any.
Negotiations
Following a successful marketing phase are negotiations with interested buyers. A trusted real estate broker, like Allegro, will lead the negotiations and communications phase of disposition to ensure you receive the best value for your property.
Negotiations during disposition typically include tasks like:
- Coordinating input and directives from all stakeholders.
- Evaluating the economic, business, and legal terms (in conjunction with counsel) of offer(s).
- Outlining the strengths and weaknesses among competing proposals.
- Selecting a preferred offer and maintaining a secondary offer (when possible) as leverage.
- Developing, presenting, and negotiating counter offers.
- Finalizing economic, business, and legal terms with counsel for final purchase and sale agreement documentation.
After quantitative and qualitative comparisons of offers, negotiations come to a close often with a letter of intent, final recommendation, and a purchase and sale agreement.
Closing
The final phase of CRE disposition is the closing phase. Similar to closing in CRE acquisition, the purpose of this phase is to ensure that the “spirit” of the negotiations is reflected in the final closing terms.
Turn to your real estate broker for assistance with:
- Reviewing the final transaction documentation with your legal counsel.
- Coordinating real estate transaction closing activities in conjunction with counsel and the title company.
- Ensuring compliance with contract documents (due diligence, waivers, contingency periods, etc.).
- Supporting internal and overseeing external public announcements.
- Coordinating the final execution of documents by all parties to the transaction.
- Managing final ownership transition and property turnover to the buyer.
After the transfer of the property’s title and funds, the disposition process is complete and you have officially optimized your portfolio by divesting an unsupportive asset.
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