Recently, I penned a post entitled "Should I Accept an Unsolicited Offer for my Commercial Real Estate".
If you missed the post, you can quickly catch up by clicking here.
The conclusion? - a resounding no. It is my firm belief, a seller can achieve a higher price by putting the market forces of buyers competing to work.
OK. Got it? Then why would any seller accept an unsolicited offer for their commercial real estate? In my opinion, the reason is contained within the list below.
Seller is desperate. More is owed than the property is worth. A lender has called a loan against the real estate. The operating company housed in the building filed bankruptcy. All could lead a seller to be desperate. If the property is marketed, the desperation becomes public - disclosed, discussed, and baked into the offering prices. Such desperation can also carry a tight time frame which won't allow a normal marketing process to be conducted.
Seller wants to avoid disruption. An owner occupant is concerned by the business interruption a marketing process will create. After all, folks will want to tour - during normal working hours when you are making and shipping things. Tours - unless very carefully controlled - distract employees and add a layer of suspicion by those working in the building. If a seller has not told his employees he is selling the building - you don't want them to find out from someone walking by their office.
The sale is a part of a bigger sale. Frequently, the sale of your commercial real estate is coupled with a sale of the business that occupies the premises. Because two sales are involved, the commercial real estate sale may pale in importance to the business sale. In such an instance, a marketing process for the building is jettisoned in favor of the business deal.
Seller is unsophisticated. Rarely is this the case. With access to on line research and countless commercial real estate professionals at the ready, most owners of commercial real estate are quite knowledgeable about the market and property values. However, in limited circumstances - and out of convenience - a seller may react emotionally to an unsolicited offer and accept it without testing the market.
The unsolicited price offered cannot be bettered in the market. I've seen this happen recently. Precautions must be made, however. You must be crystal clear with a seller - based upon what we are seeing in the market - recent sales, current avails, investor motivation, etc. - what is before you is as good as a marketing effort will produce - and without all of the appurtenant disruption a marketing process will create.
Friday, September 15, 2017
Friday, September 1, 2017
A Commercial Real Estate Deal is Really 3 Negotiations
As if one negotiation is not enough, we in the commercial real estate profession insist upon three separate negotiations for every deal. Why you may ask? Let me spend a moment and give you my take.
Negotiation One - The proposal. Once upon a time and not too long ago, a buyer's expression of interest to buy a property from a seller took the form of a binding offer - the deposit receipt and escrow instructions. Outlined were the price, escrow period, loan amounts, representations and warranties requested of the seller, and a period for due diligence and closing. The buyer signed the offer, deposited a good faith deposit with the broker and hoped his representative could convince the seller to make a deal under acceptable terms and conditions. Created, were all sorts of problems with this structure. Few buyers took the time to review the document they were signing. Misunderstandings occurred. Buyers changed their minds. Sellers decided not to sell. The impact of the sale weren't properly vetted. Buyers made commitments to move which backfired when the deals were not closed. Litigation ensued. Quite a mess. What evolved was the non binding letter of intent. Most negotiations now originate with such a letter.
Negotiation Two - The purchase and sale agreement. Because the first negotiation is via a non-binding letter, the agreed upon terms and conditions - such as the price - must be placed in a document that will commit the parties to accomplish certain things - such as opening an escrow, notarizing grant deeds, delivering clear title to the property, representing the seller is authorized to sell, etc. Ample time is given to the buyer and seller to comment on the specific language of the agreement and request changes - another negotiation. Once the binding purchase and sale agreement is signed by the buyer and seller, a period of buyer due diligence commences. During this period of time, the buyer arranges financing, checks out the physical aspects of the building - roof, fire suppression system, plumbing, electrical, heating and air conditioning, reviews the title to make sure no matters are looming, checks out the condition of the soil for potential environmental contamination, and visits with the city to insure the buyer's proposed use for the building is allowed - quite a bit to accomplish in a 30-45 day period.
Negotiation Three - The end of due diligence. Presumably, the buyer has completed all of their inspections, the lender has approved the loan, title is clean and ready to be transferred and the deal can safely move toward closing - ooops, not so fast. Invariably, something is uncovered in the due diligence period that surprises the buyer and causes another round of negotiations. These surprises can be as simple as a roof repair and as complex as an environmental clean-up. Sometimes, the issues can be fixed with a dollar credit from the seller to the buyer. However, sometimes the problems are more systemic and can result in a cancelled transaction.
Negotiation One - The proposal. Once upon a time and not too long ago, a buyer's expression of interest to buy a property from a seller took the form of a binding offer - the deposit receipt and escrow instructions. Outlined were the price, escrow period, loan amounts, representations and warranties requested of the seller, and a period for due diligence and closing. The buyer signed the offer, deposited a good faith deposit with the broker and hoped his representative could convince the seller to make a deal under acceptable terms and conditions. Created, were all sorts of problems with this structure. Few buyers took the time to review the document they were signing. Misunderstandings occurred. Buyers changed their minds. Sellers decided not to sell. The impact of the sale weren't properly vetted. Buyers made commitments to move which backfired when the deals were not closed. Litigation ensued. Quite a mess. What evolved was the non binding letter of intent. Most negotiations now originate with such a letter.
Negotiation Two - The purchase and sale agreement. Because the first negotiation is via a non-binding letter, the agreed upon terms and conditions - such as the price - must be placed in a document that will commit the parties to accomplish certain things - such as opening an escrow, notarizing grant deeds, delivering clear title to the property, representing the seller is authorized to sell, etc. Ample time is given to the buyer and seller to comment on the specific language of the agreement and request changes - another negotiation. Once the binding purchase and sale agreement is signed by the buyer and seller, a period of buyer due diligence commences. During this period of time, the buyer arranges financing, checks out the physical aspects of the building - roof, fire suppression system, plumbing, electrical, heating and air conditioning, reviews the title to make sure no matters are looming, checks out the condition of the soil for potential environmental contamination, and visits with the city to insure the buyer's proposed use for the building is allowed - quite a bit to accomplish in a 30-45 day period.
Negotiation Three - The end of due diligence. Presumably, the buyer has completed all of their inspections, the lender has approved the loan, title is clean and ready to be transferred and the deal can safely move toward closing - ooops, not so fast. Invariably, something is uncovered in the due diligence period that surprises the buyer and causes another round of negotiations. These surprises can be as simple as a roof repair and as complex as an environmental clean-up. Sometimes, the issues can be fixed with a dollar credit from the seller to the buyer. However, sometimes the problems are more systemic and can result in a cancelled transaction.
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