Most real estate investors are looking for the best possible deal when purchasing commercial real estate (CRE). Of course, the lower the purchase price and the higher the cap rate, the better the return. But in many real estate markets, commercial real estate buyers are paying top dollar for properties and may want or need to use alternative terms, like seller concessions, to make a purchase more favorable.
Learn what a seller concession is, the potential advantages and disadvantages when asking for a concession, and how to determine whether asking for a seller concession on your next commercial real estate purchase will be the right move for you.
What is a seller concession?
A seller concession is when the seller of a property agrees to pay a portion of the buyer's real estate closing costs in hopes of making the purchase more attractive for the buyer. Seller concessions can be used in residential or commercial real estate as well as with purchases or leases as a way to help lower upfront costs for the buyer and ultimately improve the deal's bottom line for them.
Typical seller concessions include covering some or all closing costs, but in commercial real estate it is common to see concessions include:
- Repairs or improvements.
- Move-in allowance.
- Inclusion of furniture or equipment.
- Reduced or waived fees.
Advantages of seller concessions when purchasing commercial real estate
Negotiating for a seller concession can make the terms much more appealing by reducing out-of-pocket expenses, especially with the numerous moving expenses and improvements a business owner typically faces when outfitting a new commercial space. If the cash needed to close is decreased or some of the anticipated costs are covered for the buyer, it can turn a financial stretch into something very achievable.
Disadvantages of seller concessions when purchasing commercial real estate
The main disadvantage to asking for a seller concession is simply that the seller may say no. They may be firm on their terms or desired sales price and unwilling to lower their bottom line by offering seller concessions. One way to combat this is by increasing your offer price while still requesting that a portion of closing costs be covered in a seller concession. Hopefully with this tactic, you'll bring the seller closer to or possibly allow them to meet their desired "bottom line" while reducing the total amount you have to bring to the table as the buyer.
Is asking for a seller concession in your next commercial real estate transaction right for you?
Seller concessions are particularly effective negotiating tools in the following scenarios:
- When there is an overabundance of the specific CRE property type in the local market.
- When the property is a less desirable Class B or Class C commercial property.
- When it's a buyer's market.
- When the market is starting to slow.
On the other hand, these are circumstances when it can be risky to ask for seller concessions because the seller may decline the offer for another buyer who is offering more favorable terms:
- When it's a seller's market.
- When the property is well priced.
- When the property is desirable property.
- When the property is ideal for the CRE buyer.
A seller is much more likely to decide to hold the property until their terms are met more favorably when the property is in a high-demand market or commercial space is at a premium.
Negotiating for seller concessions on your next commercial real estate purchase can reduce the time frame for seeing positive cash flow from the business, but there is always the potential risk of losing the perfect property to another buyer. Before buying any commercial property, do your due diligence, enlist the help of an experienced commercial broker, if desired, and talk with your lender about specific thresholds that may apply to seller concessions with your loan type.