Friday, May 6, 2016

Backup Position in a Commercial Real Estate Deal...Now What?

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Recently, I discussed how a seller should handle multiple purchase offers on a parcel of commercial real estate.

Key to a seller managing multiple offers - assemble the due diligence information before taking the property to market, make sure all of the buyers are operating with the same set of facts, be transparent when dealing with buyer's brokers, create a spreadsheet with all of the offers and note the differences, choose not one, but two buyers.

Today, I want to discuss how a buyer should behave if in back up position. Back up position is first loser, however back up position is a consolation prize of sorts. If the original buyer fails to perform, you get the nod as the back up buyer. Below are suggestions to maximize your position as the bride's maid.

Get your back up position in writing. If the seller of your dream building truly is allowing you to be in back up position, he should be willing to create a contingent contract with you. The contingency is the failure of deal number one. If deal number one fails, then the seller pivots to your deal. I would discourage a verbal agreement that places you in first place in the event the original deal craters. This structure is an agreement to agree and affords you nothing.

Conduct your due diligence simultaneously with the original buyer. Most contracts to purchase commercial real estate include a contingent period of time for the buyer to obtain financing, inspect the building, and review the title report among other things. During this "contingency period", the buyer has the right to disapprove items not satisfactory and ultimately cancel the transaction if something untoward is discovered. I counsel buyers, in back up position, to conduct their inspections as if they are the original buyer. On the one hand, the back up buyer may be wasting his time - if the original buyer performs. However, if the original buyer changes course, asks for a price reduction, requests more time, etc, the seller will be more prone to reject the original buyer's requests in favor of the back up buyer.

Stay in touch with the seller of the property. Know the original buyer's transaction dates. When is the original buyer to waive contingencies? A weekly call or email is in order to track the original transaction's progress.