Having an exit strategy early on is critical to mitigating your investment risk.
Stephen R. Covey, author of the landmark book, The 7 Habits of Highly Effective People, wisely wrote, "Begin with the end in mind".
If you're a commercial real estate investor or property owner, remember this phrase.
Commercial real estate is all about risk mitigation. To protect your money, you need to map out multiple escape routes to counteract this risk. And your exit strategies--counter to what the name would suggest--need to be in place before you close a deal and at multiple touch points across your tenure as a property owner.
Market conditions change and therefore your exit strategies need to adapt. The key is to plan your exit in advance and adjust your plans over time so you mitigate risk and potential losses.
Here are some key points to remember as you plan your exit strategies:
Don't sign a contract if you have not planned how you'll escape from it should conditions warrant such a move. Exit strategies need to be thoughtfully planned and solidified before you enter an agreement.
Ask Big Picture Questions
To plan effective exit strategies--and you should have multiple scenarios in mind--ask yourself some key questions before closing on a property and before circumstances force you to sell too quickly:
Why am I buying a commercial property? The answer to this question should help frame your exit strategy. Are you looking to flip the property once occupied? Did you invest to pay for your child's education? Are you looking to buy a single property or develop a larger investment portfolio? These are just a few questions you need to ask so you can build a suite of exit strategies that match and protect your investment goals.
How long do I want to hold the property? Again, this depends on why you want to buy the property in the first place. Certainly, an investor looking to flip a commercial property once its occupancy rate is high will have a different "escape plan" than an owner looking to hold a property for 10, 15, or 20 years.
Understand Your Exit Strategy Repertoire Could Change
Planning your exit strategy is not a "one and done" exercise. Exit planning is an ongoing process and the savviest property owners are consistently evaluating when a strategy change might be needed. Factors that could warrant a shift in your exit strategy could be:
- A longer-term shift in market conditions
- Unexpected capital expenses
- A change in other parts of your commercial real estate portfolio
- A change in your own personal finances
- Unexpected life changes
Markets always shift. Life always changes. Therefore, your exit strategy repetoire cannot be static--it needs to be reevaluated periodically and adjusted as needed.
Know Your Options
Commercial real estate investment and ownership is very complicated. Understanding the scope and nuances of your exit options is obviously critical to mapping out the right escape plan.
We've stated it before and it's worth stating again: don't go it alone. As a business person, an investor and a property owner you have a full plate. Doing a deep dive into each possible scenario is not really practical.
This is where an expert commercial real estate brokerage like MacRo can help. We can advise you on your options and collaborate with you to build an exit strategy tailored to your property or portfolio of properties. Our team can help put your exit strategy tools within the context of the market and your own personal circumstances.
Here are some common exit strategies that you'll need to understand:
- Quick sale or flip of the property
- Sell and pay capital gains outright
- Sell and do a 1031 exchange
- Cash out refinance and hold the property
- Sale leaseback
- Bequeath the property to your heir/s
- Wholesale the property or flip the contract
If you're thinking about selling a property or properties, or if you're looking for an expert advisor to help formulate/implement an exit strategy, reach out to us.
We can help you preserve your assets by thoughtfully and strategically planning divestment in advance and work with you to adjust over time.
Remember, always begin with the end in mind.
Rocky Mackintosh is President of MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He has been an active member of the Frederick, Maryland community for over four decades. He has served as chairman of the board of Frederick Memorial Hospital and as a member of the Frederick County Charter Board from 2010 to 2012. He currently serves as chairman of the board of Frederick Mutual Insurance Company. Established in 1843, it is one of the longest enduring businesses in Frederick County.