Friday, October 31, 2014

The SCARIEST things...that happen to a #CRE deal

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In honor of Halloween and an idea foisted upon me by one of our crack staff members, Lisa Congdon, this post will delve into the scary things can happen to commercial real estate occupants during a commercial real estate transaction. Before we venture into the dark side of deals past, let me set the stage for you by outlining my credentials...

I provide Location Advice for owners and occupants of industrial buildings in Southern California...AKA, I sell and lease commercial real estate for a living and have since 1984. This is my 31st Halloween as a real estate broker. I've witnessed PLENTY of scary things, which should qualify me as some sort of an expert. We will go with that anyway.

So, here goes, in no particular order:
The building inspection that you relied upon misses something. We sold a building a few years ago. During the due diligence period, our buyer left the country and asked my partner and me to engage a building inspector in his absence...which we did. The inspection proposal was addressed to us and the inspection commenced, a report was generated and based upon the findings (there were no issues identified), the buyer closed the sale deal upon his return. About a month after he closed escrow, we received a call from his attorney. The building inspector had overlooked the fact that the building had NO AIR CONDITIONING! Fortunately the building inspector made good and paid for the air-conditioning to be replaced.

Your lender suddenly changes the rules. Recently, we entered escrow on a building (I represented the buyer). We had negotiated a sixty day loan contingency with the seller (at the bank's request). As we approached our loan approval deadline, the bank decided that they wouldn't close until the buyer received BUILDING PERMITS for the buyer's tenant improvements...which meant at least a 120 day approval delay. Fortunately, the seller cooperated and granted us an extension. The deal closed (albeit several months after the original closing date).

The building you are buying appraises for less than the contract price. This happened with EVERY deal between 2009-2011 that I was involved in (or so it seemed!). We solved this in one of three ways; price reduction, increase in down payment, or a combination of the two. What I learned during these trying times was that setting the proper expectations was critically important. I was careful to point out to all concerned that our agreed upon price was SUBJECT TO appraisal...and if the building didn't appraise, we would have to discuss a solution.

You cannot possibly achieve city permitting for your your projected move in. We are seeing this issue a lot these days as it appears that ALL governmental agencies must grant your occupancy's approval. My best counsel is to ANTICIPATE the hurdles that your use will encounter and structure the transaction accordingly. As an example, if you know your use will require a high pile storage permit, communicate this to the owner of the building early and be prepared to discuss the steps needed to get your permit...which will make your request credible.

We experience September 2008 again. I will NEVER forget the day the music stopped...banks stopped lending, buyers couldn't buy and sellers couldn't sell because, overnight their buildings were worth half of the value before. Here is my formula for survival.

You discover a MAJOR un disclosed issue...structural, environmental, financial. If you discover the issue during due diligence, you generally have the ability to cancel the transaction without penalty. Once your contingencies are waived, you can generally cancel with penalty. If you discover the major issue after you become the owner or tenant, you should consult a good real estate attorney as warranty rules and recourse against an owner vary by state.

You realize that you have the right building...but the wrong broker. I currently represent an owner who had a falling out with his previous broker. You, as the occupant or owner, can choose who you want to represent you...period. If you discover that you are obligated to PAY your previous broker (you signed a lease and he repped you and you want to renew) you can still choose other representation...although it might cost you a bit more.

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