Thursday, July 2, 2015

TIME Kills ALL Commercial Real Estate Deals!

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One of the first hard lessons I learned when I entered the CRE fray in 1984 was that TIME is not a friend to a commercial real estate transaction.

As time lapses - motivations of buyers and sellers morph, market conditions vary, pricing fluctuates, business ebbs and flows, and all manner of havoc occurs that can queer a business deal.

A reminder of this lesson surfaced last week.

I received a call from a client.

In summary, my client's business model had changed and he required fifty percent more space - immediately! Normally a great situation - but - he leases his existing location and thirty three months remain on his lease obligation - so a relocation to a larger building was out of the question. We needed to lease something VERY close by to accommodate the shift in my client's business.

Good news! A building was available next door and had been for nine months - which is rare in Southern California these days - as seven of every ten industrial buildings are occupied. The two reasons the building had lain fallow for 3/4 of a year were the lack of a truck loading dock and the owner's reluctance to paint and carpet the office space.

So, the building next door to my client's mother-ship was a bit of a misfit toy. Most occupants, considering a building over 20,000 square feet (which this was), require some form of dock access - again this building had no dock access - which meant product delivered in large tractor trailer rigs had difficulty un-loading their wares - thus making the building un-desirable for most industrial occupants. My guy didn't care about the loading - he only wanted the space - and the fact that his mother-ship was next door made the vacant building ideal. I was confident we were in a great position - until...

We excitedly inquired as to the vacant building's availability. Even though a building may appear as available in a multiple listing service - you still have to verify. In this case, we were told the building owners had agreed to terms with a tenant and were negotiating a lease - BUMMER! What are the odds? A building sits for the better part of a year and right when my guy needs it, it's leased? Come on!

I am happy to say the cloud has a silver lining and my client is now the vacant building's tenant.

What happened? Time. Time killed the competing tenant's deal.

Here is how. The competing tenant believed that the owner had no other interested parties. After all, no one had stepped forward to lease the building since last Halloween - why would anyone appear now? Therefore, the competing tenant and the competing tenant's advisors became a bit over zealous in their requests for concessions - prolonged the process - and provided a window of opportunity for my client. You see, a deal is not DONE until BOTH parties sign the lease agreement. We had to move VERY quickly, ask for no concessions, and lease the space at the asking rate - but, losing the space was potentially more costly to my client than the agreed upon terms.

So the moral to the story? Approach every negotiation as though ten people are nipping at your heels. The truth is, they may be!

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