“How do we look for closing?,” client asked. We’ll call him Rob.
“We’re on target,” I responded. “Smooth sailing now.”
It hadn’t been smooth sailing before the deal was signed. We had a willing buyer and a willing seller. The property had been used largely for storage over the past ten years, but before that it had been a manufacturing facility. So environmental issues were not out of the question. Rob was the President of the business and my contact, but the property was actually owned by the widow of the former business owner. Although the business had been paying rent to the widow for years (probably overpaying), it no longer suited the needs of the business. So, it was time to cut ties. Unlike residential transactions, most commercial real estate deals are pretty lacking in the emotional area. It’s black and white. Either the property works and the price is right, or it doesn’t. I think this was more emotional for Rob, the current President of the business, than it was even for the widow owner. It meant a final cutting of ties with the former owner. But, ultimately, the business had already held onto the lease longer than it was valuable to them. The business had already moved its main facility to a better suited space, and was paying rent for storage largely out of nostalgia. Rob negotiated the deal on behalf of the widow owner, wanting to ensure she had a fair payout, if she wasn’t going to be receiving the continued revenue stream from the lease any longer. The widow was more stoic about the change. So how did we get to smooth sailing? I employed my top three tips I use in complex real estate negotiations.1. The Price is more than the Purchase Price
The purchase price is just one component of the price to be paid. There are plenty of costs to go around when a commercial property is involved. Appraisals, environmental reports (more on that below), transfer taxes, title opinion or title insurance, and closing costs are common. These can be negotiated. Each area has the “standard” for what the Buyer or Seller pays, but standard is just a starting point. When Buyer wanted us to pay for part of the environmental survey, that was a hard no. We did, however, agree to provide all environmental reports and letters in our possession. The price can also be augmented by other circumstances. In this case, the Buyer, a company that bought real estate to be used and leased to a national discount chain, wanted a very extended time frame for closing. We gave them options to extend the closing, but each was at a price. They used all three, and in the meantime, my client continued to use the property and widow was paid an additional amount to keep the deal going while Buyer got its deal with the discount chain set.
2. Clean Environmental Record
When a commercial property has been used in manufacturing or other uses, like a gas station, the ghost of uses past can spook buyers in the form of things like underground storage tanks. Here, buyers have the option to negotiate an environmental survey (or more, at different levels of detail and testing). Buyers did in this case. Knowing the property had never had an issue before, we were comfortable with this (and also knowing any buyer would likely do the same). The buyer asked for additional indemnifications for past use, and there is a tension between cutting off ties from the property completely and the buyer seeing you as responsible for the consequences of your use (or the use of previous owners). In this case, I advised Rob to successfully push for an as-is sale but allowed Buyer to complete several environmental surveys (which came up clean). Had an issue been found, we had agreed to remediate it up to a certain amount. In addition, it is standard for buyer to return the property to its previous condition if any of the testing disrupted the condition.
Conditions to closing or closing contingencies can be heavily negotiated. Rob and the widow, as the representative of the seller and the seller, respectively, wanted buyer to be tied to closing with as few conditions as possible. After all, while we were negotiating with this buyer, we were losing out on other potential buyers. On the flip side, the Buyer needed plenty of time for due diligence (see environmental section, above) and for its own diligence in working through its deal with the discount chain, which had to inspect and approve of the site as well. Since the Buyer asked us to hold the property for an extended time, we got a hefty earnest money deposit, which was earned upon the completion of the standard diligence items. In addition, the Buyer paid for each option to extend the timeframe, which meant my client was partially paid, even if the deal fell through, and then would be free to sell to a new buyer. Ultimately, the Buyer closed on the deal.
At the closing, Rob and I discussed the journey to the closing table, which that took the better part of the year. “I feel good about this,” he said. I knew he meant more than just the fact that the property was successfully closed. He completed an obligation to take care of the widow of the business’s former owner, someone who he respected and who mentored him. It was a closing of a chapter for him as well as the widow. The property is now bustling with discount shoppers, and the business is bustling in its expanded space. The sailboats had reached their destinations.