In Selling a Building Don’t Let Big Payday Slip Out the Door
July 2004 – By Jack Garson. Print Article
For commercial property owners, the sale of your property is often a long-awaited payday. With perhaps a steep rise in interest rates looming, the window for selling your property may be closing fast.
In the face of higher rates, closing sooner on a sale may produce a dramatically greater profit.
You can increase your likelihood of a successful sale with a variety of time-tested tactics and strategies: limiting the ability of a purchaser to renegotiate the deal, procuring key documents and carefully weighing the effect of transactions on your future ability to sell.
AVOIDING THE RETRADE
When you first market your property for sale, you have the best opportunity to get purchasers to compete for it. During the competition, buyers often bid up the price and maximize other terms of the sale.
Once you have committed to the terms of a transaction, however, the negotiating dynamic between the parties can change, sometimes much to the detriment of the property owner.
Some purchasers will tie up your property by entering into a purchase agreement and then attempt to renegotiate, or retrade, the deal.
SNEAKY OR SAVVY BUYERS?
Typical retrades involve the sale of a commercial office building or shopping center. The buyer puts the property under contract and then conducts studies of the property’s condition, uses, tenancies and other important characteristics.
The buyer, sneaky or savvy depending on your perspective, presents a list of defects and requests a reduction in the purchase price. Now, you are vulnerable.
Other prospective buyers have long since disappeared. You may worry that if this deal falls through, other buyers will wonder if the property truly is defective. And now you have lost time, money and momentum on the current deal and could end up no better off with another buyer.
MORE THAN MONEY IS INVOLVED
But there are numerous ways that you can avoid a retrade. First, don’t focus just on the purchase price in a buyer’s offer. A high purchase price can be a distraction from other disadvantageous terms, especially when those other terms may ultimately lead to a reduction in the price.
For example, the buyer might ask if the purchase price can be reduced by the cost of repairing the roof or otherwise bringing the property to some desired condition.
If the buyer’s studies reveal the presence of hazardous materials, can the buyer set off the cost of remediation against the purchase price even when the discharge of dry-cleaning solvent or gasoline leaks should have been expected by all parties?
Other provisions that appear to be non-economic can have a significant economic impact on the net purchase price.
Can the buyer delay settlement for protracted time periods without any increase in the purchase price? Remember, when interest and inflation return to historical rates, time will once again equal money.
In short, you must weigh the potential economic effect of the non-economic terms of any purchase offer.
DONT LET THEM BACK OUT
Second, limit the purchaser’s ability to terminate the agreement.
If the purchaser can freely terminate the agreement, then the purchaser has considerable leverage to renegotiate once the other prospective buyers are no longer interested in your property. Instead of broad termination rights, restrict the purchaser to specific contingencies.
The bottom line is that if you limit the purchaser’s freedom to terminate the contract, you also limit the purchaser’s ability to renegotiate the contract.
Third, to avoid a retrade, investigate the prospective purchaser.
Some buyers are notorious for retrading a deal. They will entice you with a higher purchase price but will always try to renegotiate.
Other buyers may offer less but will stick to their offer.
Understanding with whom you are dealing will help you make better choices while several prospective purchasers are still in the competition.
Most any purchaser, as well as the lender financing the purchase, will require key documents regarding your property, documents pertaining to any tenants and information on the permitted use and the condition of your property.
These important documents cover such things as length of leases, rent increases, lender protections and financial statements.
In a typical purchase, both purchaser and lender will require the tenant documents for most of your tenants. It is critical that your leases detail these requirements and enable you to get these documents from your tenants quickly.
Typically, purchasers will seek their own information regarding the permitted use and condition of your property.
However, to speed the process and limit the potential for renegotiation, gather studies of the property from reputable companies and allow prospective purchasers to review the studies before entering into any contract.
THE FUTURE IS NOW
It is also critical to recognize the impact of current transactions on your future ability to sell.
For example, refinancing your property with a loan that prohibits prepayment may restrict your ability to resell.
The inability to prepay may hurt your ability to resell by excluding potential purchasers, such as those who wish to use their own funds to purchase the property.
Similarly, transactions with your tenants may affect your ability to sell.
For example, a right of first refusal provided to a tenant, allowing the tenant to match any offer to purchase the property may chill your efforts to sell the property.
Simply put, a purchaser is not eager to devote the necessary resources to negotiate a deal to purchase the property if a tenant will have the opportunity to match the offer.
The savvy seller understands the legal and practical landscape and prepares carefully to that long-awaited payday.
Jack Garson is the founding principal of the law firm of Garson Law LLC in Bethesda, MD, and has extensive experience in commercial real estate, leasing and business strategy.