What Can Loss Teach us about Commercial Real Estate?

Loss. Simply, “the state or feeling of grief when deprived of someone or something of value.” 2020 so far has been a year of loss. Businesses bankrupted, careers cratered, freedoms foregone, routines re-routed, celebrations cancelled - all losses - in some cases forever. Required are we to change - like it or not.

 Last week, our family experienced loss in its most poignant form. Our father, Samuel A. Buchanan Jr. left us to be with the Lord. I’m certain this is true. Dad was a faithful follower of Jesus and loved his church. Suffering from a terrible bout with cancer - fortunately, Dad’s final days were peaceful. He left a legacy of five children, ten grandchildren, nine great grands, and countless friends. I’m sad that Dad is gone but relieved he is no longer in pain. Thank you for allowing me to share that!

 So, what - you may be wondering - does loss have to do with commercial real estate? Only this. From loss comes gain. Here are a few examples.

 2008 ended with many commercial real estate professionals scrambling. Our world abruptly halted. Buyers weren’t buying, sellers refused to sell at such depressed values, and lenders were more frozen than Queen Elsa. Tenants suddenly were seeking great deals. Landlords were stubborn. A mist of uncertainty shrouded our industry akin to that over the Enchanted Forest in Frozen II. Yeah. Recently, I got my Papa cred by watching The Disney Channel with our grandkids. But I digress.

 In 2009, we were forced to adapt. With vacancy in commercial properties rapidly rising, I focused on tenants and buyers. “Blends and extends” became a thing - a reduction in a rental rate today in exchange for a longer lease term. ‘Working out loud” - a phrase coined by my wife, Carla - was the start of a blog in 2010. Authored is digital content for owners and occupants of industrial buildings in Southern California. The Location Advice blog is now published by the Southern California News Group on Sundays. Yep. You’re reading a post now. A return to fundamentals caused the decade of the 2010’s to be my best yet.

 Gains from the losses we’ve experienced in 2020 are starting to sprout. E-commerce has exploded. More folks are shopping from their iPad vs visiting a brick and mortar store. Logistics companies that feed the supply chain are hustling to fulfill demand.

 Material handling outfits - forklifts, racking, dock and door equipment - are recording a record year. Owners of warehouses have enjoyed steady rent checks.

Rumored is a re-shoring of manufacturing. Our economy’s dependence on cheap stuff may shift. Less reliance on low cost production will cause prices to rise but quality and reliability will as well.

 Regional malls could spell the end of our housing crises. How, you might ask? Brookfield Properties made an enormous bet on mall ownership in 2018. Currently, Brookfield is the nation’s second largest owner of regional malls. As we see major mall tenants such as Sears, JC Penney, Neiman Marcus, Macy’s, Pier One, J-Crew, Forever 21, Brooks Brothers and others struggle and fail - watch a gradual re-tooling of these massive spaces into multi-family mixed use re-developments. Closer to home, Integral Communities just bought the land beneath the JC Penney store at the Village in Orange. A similar proposed development is slated for a portion of Main Place Mall. So, it’s happening!

 I’ll always be grateful to my Dad for not hiring me to run the family business. The rejection motivated me to seek an alternate career path - commercial real estate brokerage. What I viewed as an horrendous loss at the time resulted in a huge gain.

 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.blogspot.com.

How to AVOID the Re-Trade in Deals

Last week week we covered four things that can occur once a commercial real estate deal reaches the end of its contingency period - that time frame whereby a buyer can determine - in its sole discretion - whether the proceed to close. As you recall - the four outcomes are - move forward, cancel, seek additional contingency time or ask for a price reduction - AKA re-trade.

 Promised last week was a discussion of how to avoid a re-trade. But first, let’s spend a moment and dissect this request a bit more. Once a buyer spends time and money understanding a commercial real estate purchase - in many cases they know the building better than the owner. After all, they’ve poked, prodded, reviewed, surveyed, and analyzed every aspect of the structure, title, roof, HVAC, mechanical systems, zoning, tenancy if any, and operating history. Therefore, it should come as no surprise if something untoward is discovered. Hopefully, what’s uncovered is a minor fix and the deal can proceed smoothly. However, if the issue requires a price reduction, your options as a seller are:

 Agreement. If the request is well reasoned and thoughtful you might simply agree.

 Cancellation. I’ve seen sellers get very defensive and cancel. Certainly, this is your right. You entered a contract to sell for a certain price. Your buyer agreed to buy the property in its “as-is” condition. Now they’ll proceed - but at a lesser amount. Sure. Something is cheesy about a buyer that operates this way. A deal’s a deal. But, if you walk away, the next buyer may ask for more. You’ll certainly have to disclose what you encountered. Plus, you’ll now start over with another buyer and reset the shot clock with another contingency period.

 Compromise. We just completed a lengthy due diligence. The buyer discovered three things that gave them heartburn. We successfully whittled the three down to one and the seller agreed to a slight price reduction to remedy the remaining problem. Had the buyer sought recompense for all three - the conversation would have been short. Fortunately, the seller was prepared and the buyer’s ask was reasonable. Game on!

 But, in my experience the best way to avoid a re-trade is to anticipate them and prepare. You know your buyer will require a water-tight roof. How about conducting a preemptive inspection? You’ll then know if there is a problem. Take it a step further and get bids from contractors to repair the leaks. I’ve found some buyers will inflate the cost to remedy what they find. Imagine that! It’s your option whether you bear the expense pre-marketing or wait. You’ll then be armed to address any request for a price reduction - because you know the extent of the issue and what it costs to fix it. I also enjoy putting a seller into a great offensive position - with back-up buyers who’ll step in and perform in case buyer number one hiccups.

 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.blogspot.com.

The DREADED Re-Trade in Commercial Real Estate Deals!

Ahhh, the dreaded re-trade! Simply. A buyer asking for a price reduction well into the purchase process, prior to close, but before they are contingency free. 

Buying a parcel of commercial real estate is really three negotiations. I even wrote about it here. http://allencbuchanan.blogspot.com/search?q=Three+negotiations. A quick review of the three is in order. First - price and terms. This conversation could take place through a binding Purchase and Sale Agreement but typically is negotiated via a non-binding Letter of Intent. Next - Purchase and Sale Agreement talks - if not handled in the first dialogue. And the final discussion - which occurs once a buyer has completed their due diligence - and where the re-trade can happen. 

Generally, commercial real estate transactions allow the buyer a certain amount of time to inspect what he’s purchasing. Reviewing a title report, conducting environmental surveys, insuring the AC blows cold air, and confirming the roof doesn’t leak usually are done. Also in this no obligation contingency period - the buyer arranges financing, interviews the tenants if any, and pours over leases, utility bills, aged receivables, operating statements, and anything else they can dredge up. A quick trip to the city may be important to work out any zoning concerns. We see 30-45 days as a typical contingency time frame. Once ALL this is completed - the buyer decides to move forward, cancel, request additional time, or ask for a price reduction to offset anything untoward discovered. Since a monetary remedy is sought - in effect the purchase price is re-traded or re-negotiated. Bummer!

Let’s discuss in detail the four ways a deal can proceed once due diligence is completed - shall we?

Move forward. The BEST result for buyer and seller! Everything came out great. Lender approved the loan, city welcomed the new business with flowers, all systems are AOK and pilot you are cleared for landing! I can tell you from experience, this happens about 10% of the time. As a seller - if you get this outcome - awesome! Count yourself among the very fortunate. 

Cancel. Extreme! But it happens. Generally cancellation is trumpeted far before the end of a buyer’s contingency. Sure. We’ve all had deals stall in the “red zone”. However, in my dealings, you know when a transaction is doomed. Entrenched within all real estate professionals is a sixth sense of sorts that shouts “danger Will Rogers!” Cancellation occurs in around 5% of all deals. What causes a buyer to walk away will be discussed another day. 

Request additional time. Executing deals during our shelter-in-home period found many buyers asking for additional days to complete their study. Inspectors - hampered by rules and regs, lenders swamped by PPP loan processing, sellers squeamish about tours - all contributed to slow the process. Typical 30-45 day contingency periods became 45-60 days. Frankly, the delays were out of the buyer’s control. 50% of deals reach this crossroad. 

Re-trade. Maybe my least favorite outcome! Why? Because you are so close - yet so far away. Sellers have agreed to the purchase price. Buyers now want some blood. If not properly managed - this can quickly spiral out of control. Plus, as the intermediary, you’re often sought to “bridge the gap”. Candidly, sometimes a cancellation is easier. At least contention is avoided and energy can be expended to locate another buyer. However, close to 75% of agreements include some sort of “ask”. Roof and heating, ventilation, and cooling head the buyer’s list. These are major capital expenditures that must be addressed. Buyers gladly ask for a seller to pay. 

Next week I’ll discuss the ways you can minimize or avoid a re-trade. So, stay tuned!

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.blogspot.com.