When is a Commercial Real Estate Deal Most Vulnerable?

Akin to those toddlers who taught me lessons recently - a commercial real estate transaction is born and grows up. In effect, it has a life. Every stage is fraught with vulnerability. It starts as a need for more space, a downsize, a move out of state, a consolidation, or a sale where capital gains must be deferred. The end occurs when the new digs are occupied or the exchange is perfected. What happens in between - navigating the process - is column worthy - and where deals are most fragile.

Determining the need. All commercial real estate deals - leases, purchases, investments - begin with a need. If your company just acquired a competitor - chances are - excess locations must be considered - sold, subleased, or occupied. Exponential growth in your revenue may be handled with additional employees, new machinery, or a re-work of your plant’s layout. But - where praytell will the new hires sit if you’re out of space? A deal for another building may be spawned. However, many transactions are squashed at this stage because no move occurs. Another solution arises - additional offices are built in the existing location, new warehouse racking is installed, or a production mezzanine is added.

Deciding on a process. Testing the market of available space will require you to go it alone or engage a commercial real estate professional. If you search Loopnet for what’s available - you may quickly become jaded. The information isn’t as readily available to you as residential data published by Realtor.com or Redfin. Therefore, you’ll need a tour guide - AKA a commercial agent.

Searching. Touring a few vacant buildings may dissuade you from moving. You see - many times “there’s no place like home!” Will a cost savings occur? How about a better efficiency? Double the amount of square footage - is your increased revenue able to handle the bump in rent? Is your purchase down-payment better used in the business vs. buying a building?

Negotiating. Go in too hot - you’ll lose deals. In this owner tilted market - there aren’t that many to lose. If you fail to anticipate the needed time frames for securing financing, achieving city approvals, and checking out the roof, air conditioning, plumbing - and structure accordingly - you’re deal might crater when you request more days.

Executing. Once the paperwork is signed - the fun begins. You must now figure out if you can perform. You’ll have a decent idea - because you will have secured a pre-qualification letter from your bank - and your down payment funds are tucked away in a liquid account. But, unless the seller has provided you with a complete package of due diligence information - Enviro report, building inspection, zoning uses, plans, permits, and operating statements - you must create these reports. Countless deals die on the battlefield of due diligence as something untoward is discovered - the property once housed a landfill, the roof is porous, or the HVAC units are original.

Closing. Once contingencies are waived - a significant deposit is non-refundable. Simply, you cannot walk away without penalty. Do deals die at this stage? Sure - but rarely.

So, when is a commercial real estate deal most vulnerable? The easy answer? Before it closes! However - there is a bit more to dissect - as outlined above.

Allen C. Buchanan, SIOR is a principal with Lee & Associates Commercial Real Estate Services. He can be reached at 714.564.7104 or abuchanan@lee-associates.com

Negotiations are Stuck! Now What? _ Suggestions

Commercial real estate transactions require negotiation. Duh! But, candidly, the back and forth is my least favorite part of a deal. Many consider the volleying a sport - one that must be won or lost. Skillful negotiators realize - in order for there to be a successful outcome - both parties must win. I’ve witnessed sellers - down to their dying breath - decide they’d rather give the building back to the bank vs conclude a transaction with an over zealous buyer. 

Conversely - I’ve seen buyers - whose business growth depends upon buying a building walk away due to a minute tweak in the terms. The worst - however - is a stand-off. Akin to heads-of-state squared up in an intense disagreement - the mantra of “he who first blinks loses” is repeated. As commercial real estate professionals - we find ourselves between the warring factions - struggling to find common ground.

If your negotiations are mired - what can be done? Below are _ suggestions.

Why are you at an impasse. Price? Terms - such as the length of escrow or deposit structure? Maybe your issue is more esoteric - your seller has the impression the buyer can’t perform and therefore is holding firm. If the conversations have been many rounds - sometimes a party gets weary - enough already! Regardless - the solution is often contained in the reason for the roadblock.

What’s at stake. The owner I referenced above had to sell or the bank was going to foreclose. However, he had to salvage something - even if it was his dignity. Buyers came along sensing a fire sale! What the buyers failed to recognize? At a point - the seller would simply fold and allow the lender to take the premises - consequences be damned. Just when you believe a seller has no room to maneuver - in fact he does. Never underestimate a desperate seller.

What are your alternatives. Too often a buyer will confuse his operational goals with his purchase criteria. Early in the process - gain an understanding of the buyer’s motivation for the purchase. If the buy will allow him to hire more folks, generate more sales, carry more inventory, accommodate new machinery, or manufacture a new line of products - there is an economic motivation. If negotiations reach a standstill - we review the benefit and downside. Sometimes that difference in price becomes moot in light of the increase in business revenue - or loss if he doesn’t move forward.

Are there non-monetary solutions. Occasionally, parties will agree on price but stall for other reasons. Most common would be a closing date. You see, some sellers benefit from a quick conclusion while others would prefer to postpone the final bell. Sometimes a buyer requires a bit more time to process a loan or bridge a lease obligation. So hypothetically - a seller wants finality in 60 days but the buyer is adamant about 90. Maybe the buyer can beef up his deposit in return for the extra 30 days.

Time to say good bye. Once in a while - the best deal is the one you DON’T make. I’ve found if transactions are meant to be - motivations are aligned and transparent negotiations take place - a rhythm evolves between the parties. It’s a beautiful thing! However, if you find yourself working diligently to resolve minutiae - maybe the stars won’t align. Time to crank up that search for another building.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.com.