When is a Commercial Real Estate Deal Most Vulnerable?

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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