Keys To Closing Commercial Real Estate Transactions

Anyone who thinks Closing a commercial real estate transaction is a clean, easy, stress-free undertaking has never closed a commercial real estate transaction. Expect the unexpected, and be prepared to deal with it.

I’ve been closing commercial real estate transactions for nearly 30 years. I grew up in the commercial real estate business.

My father was a “land guy”. He assembled land, put in infrastructure and sold it for a profit. His mantra: “Buy by the acre, sell by the square foot.” From an early age, he drilled into my head the need to “be a deal maker; not a deal breaker.” This was always coupled with the admonition: “If the deal doesn’t close, no one is happy.” His theory was that attorneys sometimes “kill tough deals” simply because they don’t want to be blamed if something goes wrong.

Over the years I learned that commercial real estate Closings require much more than mere casual attention. Even a typically complex commercial real estate Closing is a highly intense undertaking requiring disciplined and creative problem solving to adapt to ever changing circumstances. In many cases, only focused and persistent attention to every detail will result in a successful Closing. Commercial real estate Closings are, in a word, “messy”.

A key point to understand is that commercial real estate Closings do not “just happen”; they are made to happen. There is a time-proven method for successfully Closing commercial real estate transactions. That method requires adherence to the four KEYS TO CLOSING outlined below:

KEYS TO CLOSING

1. Have a Plan: This sounds obvious, but it is remarkable how many times no specific Plan for Closing is developed. It is not a sufficient Plan to merely say: “I like a particular piece of property; I want to own it.” That is not a Plan. That may be a goal, but that is not a Plan.

A Plan requires a clear and detailed vision of what, specifically, you want to accomplish, and how you intend to accomplish it. For instance, if the objective is to acquire a large warehouse/light manufacturing facility with the intent to convert it to a mixed use development with first floor retail, a multi-deck parking garage and upper level condominiums or apartments, the transaction Plan must include all steps necessary to get from where you are today to where you need to be to fulfill your objective. If the intent, instead, is to demolish the building and build a strip shopping center, the Plan will require a different approach. If the intent is to simply continue to use the facility for warehousing and light manufacturing, a Plan is still required, but it may be substantially less complex.

In each case, developing the transaction Plan should begin when the transaction is first conceived and should focus on the requirements for successfully Closing upon conditions that will achieve the Plan objective. The Plan must guide contract negotiations, so that the Purchase Agreement reflects the Plan and the steps necessary for Closing and post-Closing use. If Plan implementation requires particular zoning requirements, or creation of easements, or termination of party wall rights, or confirmation of structural elements of a building, or availability of utilities, or availability of municipal entitlements, or environmental remediation and regulatory clearance, or other identifiable requirements, the Plan and the Purchase Agreement must address those issues and include those requirements as conditions to Closing.

If it is unclear at the time of negotiating and entering into the Purchase Agreement whether all necessary conditions exists, the Plan must include a suitable period to conduct a focused and diligent investigation of all issues material to fulfilling the Plan. Not only must the Plan include a period for investigation, the investigation must actually take place with all due diligence.

NOTE: The term is “Due Diligence”; not “do diligence”. The amount of diligence required in conducting the investigation is the amount of diligence required under the circumstances of the transaction to answer in the affirmative all questions that must be answered “yes”, and to answer in the negative all questions that must be answered “no”. The transaction Plan will help focus attention on what these questions are. [Ask for a copy of my January, 2006 article: Due Diligence: Checklists for Commercial Real Estate Transactions.]

2. Assess And Understand the Issues: Closely connected to the importance of having a Plan is the importance of understanding all significant issues that may arise in implementing the Plan. Some issues may represent obstacles, while others represent opportunities. One of the greatest causes of transaction failure is a lack of understanding of the issues or how to resolve them in a way that furthers the Plan.

Various risk shifting techniques are available and useful to address and mitigate transaction risks. Among them is title insurance with appropriate use of available commercial endorsements. In addressing potential risk shifting opportunities related to real estate title concerns, understanding the difference between a “real property law issue” vs. a “title insurance risk issue” is critical. Experienced commercial real estate counsel familiar with available commercial endorsements can often overcome what sometimes appear to be insurmountable title obstacles through creative draftsmanship and the assistance of a knowledgeable title underwriter.

Beyond title issues, there are numerous other transaction issues likely to arise as a commercial real estate transaction proceeds toward Closing. With commercial real estate, negotiations seldom end with execution of the Purchase Agreement.

New and unexpected issues often arise on the path toward Closing that require creative problem-solving and further negotiation. Sometimes these issues arise as a result of facts learned during the buyer’s due diligence investigation. Other times they arise because independent third-parties necessary to the transaction have interests adverse to, or at least different from, the interests of the seller, buyer or buyer’s lender. When obstacles arise, tailor-made solutions are often required to accommodate the needs of all concerned parties so the transaction can proceed to Closing. To appropriately tailor a solution, you have to understand the issue and its impact on the legitimate needs of those affected.

3. Recognize And Overcome Third Party Inertia: A major source of frustration, delay and, sometimes, failure of commercial real estate transactions results from what I refer to as “third-party inertia”. Recognize that the Closing deadlines important to transaction participants are often meaningless to unrelated third parties whose participation and cooperation is vital to moving the transaction forward. Chief among third-party dawdlers are governmental agencies, but the culprit may be any third party vendor or other third party not controlled by the buyer or seller. For them, the transaction is often “just another file” on their already cluttered desk.

Experienced commercial real estate counsel is often in the best position to recognize inordinate delay by third parties and can often cajole recalcitrant third parties into action with an appropriately timed telephone call. Often, experienced commercial real estate counsel will have developed relationships with necessary vendors and third parties through prior transactions, and can use those established relationships to expedite the transaction at hand. Most importantly, however, experienced commercial real estate counsel is able to recognize when undue delay is occurring and push for a timely response when appropriate. Third party vendors are human (they claim) and typically respond to timely appeals for action. It is the old cliché at work: “The squeaky wheel gets the oil”. Care must be taken, however, to tactfully apply pressure only when necessary and appropriate. Repeated requests or demands for action when inappropriate to the circumstance runs the risk of alienating a necessary party and adding to delay instead of eliminating it. Once again, human nature at work. Experienced commercial real estate counsel will often understand when to apply pressure and when to lay off.

4. Prepare For The Closing Frenzy: Like it or not, controlled chaos leading up to Closing is the norm rather than the exception for commercial real estate transactions. It occurs because of the necessity of relying on independent third parties, the necessity of providing certifications and showings dated in close proximity to Closing, and because new issues often arise at or near Closing as a consequence of facts and information discovered through the continual exercise of due diligence on the path toward Closing.

Whether dealing with third-party lessees, lenders, appraisers, local planning, zoning or taxing authorities, public or quasi-public utilities, project surveyors, environmental consultants, title insurance companies, adjoining property owners, insurance companies, structural engineers, state or local departments of transportation, or other necessary third-party vendors or participants, it will often be the case that you must wait for them to react within their own time-frame to enable the Closing to proceed. The transaction is seldom as important to them as it is to the buyer and seller.

To the casual observer, building-in additional lead-time to allow for stragglers and dawdlers to act may seem to be an appropriate solution. The practical reality, however, is that many tasks must be completed within a narrow window of time just prior to Closing.

As much as one may wish to eliminate the last minute rush in the days just before Closing, in many instances it is just not possible. Many documents and “showings”, such as UCC searches, surveys, water department certifications, governmental notices, appraisals, property inspection reports, environmental site assessments, estoppel certificates, rent rolls, certificates of authority, and the like, must be dated near in time to the Closing, often within a few days or weeks of Closing. If prepared and dated too far in advance, they become stale and meaningless and must be redone, resulting in additional time and expense.

The reality is that commercial real estate Closings often involve big dollar amounts and evolving circumstances. Rather than complain and stress-out over the hectic pace of coordinating all Closing requirements and conditions as Closing approaches, you are wise to anticipate the fast paced frenzy leading up to Closing and should be prepared for it. As Closing approaches, commercial real estate counsel, real estate brokers and necessary representatives of the buyer and seller should remain available and ready to respond to changing demands and circumstances. This is not a time to go on vacation or to be on an out of town business trip. It is a time to remain focused and ready for action.

Recognizing that pre-Closing frenzy is the norm rather than an exception for commercial real estate transactions may help ease tension among the parties and their respective counsel and pave the way for a successful Closing.

Like it or not, this is the way it is. Prepare for the Closing frenzy and be available to respond. This is the way it works. Anyone who tells you differently is either lying to you or has had little experience in Closing commercial real estate transactions.

So there you have it. The four KEYS TO CLOSING a commercial real estate transaction.

1. Have a Plan

2. Assess And Understand the Issues

3. Recognize And Overcome Third Party Inertia

4. Prepare For The Closing Frenzy

Apply these Keys to Closing, and your chance of success goes up. Ignore these Keys to Closing, and your transaction may drift into oblivion.

How a Commercial Real Estate Broker Can Help You

Commercial real estate is a booming business; however, whether you are buying or selling commercial real estate, chances are that you are going to need a bit of help. A good real estate broker can be invaluable to you, and they can provide you with a great deal of help that no one else could ever give to you. If you want to have a successful career in the commercial real estate business, then more than likely you will need to work with a commercial real estate broker from time to time. The following are some of the great ways that a commercial real estate broker can be of help to you.

Local Land Values

Having a commercial real estate broker working with you can be very helpful when it comes to local land values. As an investor, you may not always be investing in commercial real estate that is in your area, and it can be hard to find out what the land values are in the area that you are considering investing in. When you work with a commercial real estate agent, they usually have a good grasp on local land values and can help you make good decisions based upon this information. This saves you having to do a great deal of research on your own to find out the same information.

Access to City Officials

If you have been working in the commercial real estate field long, you know that there are many times in this line of work when you have to deal with various city officials. At times this can be difficult, since you may not be familiar with them and you may have a hard time finding time to speak with them. When you work with a commercial real estate broker, many times you will find that they already have direct access to the city officials, which can expedite your deals much of the time.

Negotiation and Constructing Offers

Another great reason to have a commercial real estate broker is that they can do a great deal of the negotiating for you on a deal. It is usually better to have a broker as a go-between instead of dealing directly with the other person in a deal. A broker can usually more effectively negotiate the terms of a deal. They can also help you to construct offers as well so that you will be able to present a good offer on a piece of commercial property.

Exit Strategies

More than likely there will be some point in time when you will find it imperative that you get out of a commercial real estate deal. This can be hard to do on your own, but when you have a commercial real estate broker to help you, then can help you to come up with a solid exit strategy if you need it. When you get out of a deal, you need to have a great strategy that is totally legal, or you may end up losing a great deal of money. Having the commercial real estate broker there to help you can ensure that you exit the deal in a legal way that will not hurt you as well.

Referrals to Other Professionals

Commercial real estate brokers can also be of help to you by referring you to other professionals that can be helpful to you as well. This is especially great if you are new to the commercial real estate industry, you have just moved into a new area, or you are investing outside of the area when you live. It can be difficult to find good professionals to work with, such as lawyers, contractors, inspectors, and engineers. When you are dealing with a commercial real estate agent that you trust, they can refer you to other people that you can trust as well. This saves you the hassle of trying to find some of these professionals on your own without anyone’s recommendations to go on, which can be disastrous in some cases.

Lenders

Another area that a commercial real estate broker can help you with is the financing for your commercial real estate purchase. These broker work with a variety of different lenders from day to day, and if you are looking for financing for your venture, more than likely they can steer you in the right direction. They may even know of some private lenders that may be of some help to you as well.

First Grab at Targeted Properties

Having a commercial real estate broker can be very beneficial to you because they can also allow you to have first grab at some targeted properties that they know of. No doubt there are times when you find a great property, only to find out that it is already under contract and you spoke too late. If the broker knows what you are looking for, they may be able to pocket the listing so you can have the first chance at it.

When you do find a great commercial real estate broker, it is important that you hold onto them. A great broker can be invaluable and can help you out in a variety of ways that will help make you successful in the commercial real estate market. Working together with the same great broker over and over can be mutually beneficial to both of you. They will get the rewards of your business, and you will be able to enjoy the many benefits of working with an excellent commercial real estate broker that you can trust. When you find a good broker, they are definitely worth the money that you will pay out to use them.

How to Do a Sales Pitch in Commercial Real Estate

In commercial real estate, you will undertake a variety of presentations, in a variety of circumstances. Most of them are business-like in nature, focusing on the needs of the tenant, the property buyer, or the property seller.

Get to the core issues

Each of these groups has unique property requirements and points of focus. It is their needs which must be identified and clearly addressed in the sales pitch or presentation. Many successful commercial real estate agents will have a preliminary meeting with the client or customer so that they can identify key issues and concerns. This allows the commercial agent to return to the client or customer in a few days with a well structured proposal that addresses the needs of the customer or client.

It’s all about THEM, not YOU!

When you design an investment or commercial property proposal for presentation, the document should be 90% regards the property and the client. Frequently you see this rule disregarded or broken with the proposal document being largely regards the agency and the personnel.

Rarely is the property transaction a simple matter of the property rental, the property price, or the physical elements of the property. In most situations, it is the combination of these things which must satisfy a fundamental equation of need that the customer or client has. In getting them to this fundamental need, you will identify an element of pain that the customer or client is experiencing. This is what you focus on.

They are Experienced

It is interesting to note that many clients and customers in commercial real estate are reasonably comfortable in circumstances of business negotiation. This means they may not tell you the total big picture or all the elements of a transaction until they are ready. Conversation and connection in the presentation process should be biased towards the client or customer using well selected questions which allow the agent to interpret the body language coming from the client’s response.

When you believe you have identified the element of clients pain related to the property transaction, you start to magnify the problem in terms of today’s market, then offering stable and logical solutions that your real estate agency business can provide to the client or customer. Invariably, the commercial real estate transaction in today’s market centres on financial matters such as:

  • High vacancy factors
  • Other property choices and chances are available
  • Underperforming leases
  • Unstable cash flow
  • Unstable tenancy mix
  • Tenanted conflict
  • Escalating building operating costs
  • A shift in demographics which exposes the property to a unstable future
  • Mortgage payment pressures
  • Age of the asset
  • Needs for refurbishment or extension
  • Competition properties attracting tenants away from the subject property

This type of information and interpretation requires your intimate knowledge of the local region. This is by both property type and by location. This is the higher value that you bring to the customer or client. Being able to distinctly define local market awareness is a major advantage in any commercial real estate presentation or sales pitch. You must be seen as the best knowledgeable solution to the problem.

From Experience

After many years working exclusively in the commercial real estate industry, I found that my unique skill was in market knowledge and the display of that in any formal presentation to the client. Being able to talk about market trends and financial performance in a solid and sound way will help the client understand that they need your services. Coupling that with your extensive and relevant database of enquiry clearly shows the client that they need you.

A fantastic commercial real estate presentation is a function and balance of lots of things. Things like:

  1. A well established pre-planning process is a strategic advantage for every commercial real estate presentation. Strategy is everything in commercial real estate. Every property presentation requires planning.
  2. Making sure you are asking the right questions of the client or prospect. Plan your questions relative to the subject property so that you help the client think about opportunity and changes that are possible.
  3. Using your market knowledge and giving good answers. Have a variety of market facts and trends available to call on. Feed them into your presentation; facts are always useful. They can also be used as a channel to direct the discussion when the client is forcing you to justify your approach or your experience. Confidence and control must be the basic rule of your property presentation. When the client takes control of the presentation you have lost.
  4. Using your experience in the marketplace so that you are telling relevant stories of success in similar properties. Stories of other properties will always interest of the client.
  5. Making sure your personal presentation is optimised for the connection in the presentation. It can be that you are using a combination of the proposal document, the marketing document, and computer slide presentation, samples of your database, photographs of the subject property projected on to slides, and photographs of comparable properties projected on to slides.
  6. Choosing the placement of people at the table or strategically positioning them in the room is always important. Much has been written about where you should sit relative to the client. The basic rule is adjacent to the client rather than across an area of barrier such as a table. Being within arm’s reach allows you to pass documentation to the client at the appropriate time. Documentation should not be provided to the client until you are ready for them to review it; otherwise it is a distraction of their attention.
  7. Make sure that your proposal is simple and yet well directed with a clearly defined outcomes of sale or lease. Many proposal documents in commercial real estate are much too wordy so the main messages are lost and not clearly defined. The best proposals are less wordy and more illustrative. The best balance of a commercial real estate proposal is a mixture of 25% words, 25% pictures, 25% graphs, and 25% white space. This becomes a document which is clearly read and understood.
  8. Combine good illustrations and photographs of the subject property into the proposal or presentation so that any lengthy descriptions or paragraphs are broken up. This will keep interest of the client in your documentation.
  9. Make sure that your marketing package is value for money, and yet reaching the target market that the property serves or needs to attract. All too often, we see examples of generic marketing by the commercial real estate agent to the broader and less specific marketplace. Showing the client that you clearly know and will attract best the target market will always help your conversion to a potential listing. Be very specific about the target market and how you will reach it.
  10. Ensure that your commission costs are fair and reasonable for the location. In most circumstances, discounting your commission should not be an option as it will make you poor and remove or detract from your enthusiasm for the sale or lease. ‘Cheap’ means ‘cheap and without focus’ and the client needs to know this. The property deserves better. You are not cheap because you are the best and you do a great job. A fair commission is always paid for a positive property outcome.
  11. Always provide testimonials that are relevant to the property transaction. When you combine relevant history and details of happy customers into your presentation you will make the client feel more comfortable.
  12. Always display clear and sound market knowledge that impresses the client relative to their property. This will include extensive awareness of comparable properties that compete with the subject property. You should be able to talk solidly about property prices, comparable rents, rental growth, returns on investment, changes to the future demographics of the area, and properties in the immediate precinct of relevance. In many cases, it pays to walk around the local area just prior to any property presentation so that you bring immediate and clear pictures of the precinct to the discussion. Many times this has been of significant advantage in my presentation processes. Talking about neighbouring properties localises the client and their thought processes.
  13. Come up with a variety of ways to serve the client. Innovation and relevance will always impress. In today’s market, this is relatively easy considering the marketing opportunities and tools provided by the internet & technology. Be proactive in your property promotion processes so that the listing for sale or lease stands uniquely different in its marketing campaign from the others in the area. This does not have to be expensive to the client or to your office, given that the internet and electronic technology is historically cost effective. In today’s market, the traditional methods of publicising the property in the property pages of the local paper, is becoming much less important in the marketing campaign. Most commercial property buyers and tenants research the market from the Internet first and foremost.
  14. Almost every property agency will say that they have excellent communication and connection skills to support the property promotion process. From experience, this is largely incorrect and typically the average commercial salesperson or leasing person will exercise ordinary communication channels with the client. Put yourself in the shoes of the client. They expect and deserve frequent updates on the promotion of the property even when nothing is happening or when the adverts are producing little response. When a property campaign is not producing the results, it is important that you act or adjust with alternative recommendations and strategic changes to the promotional campaign for the client to consider. Rarely would you get to the property campaign correct in the first week. It is in this time that you must consider fine tuning the promotion process so that the target market is being reached in a timely and effective way. This means that every property enquiry generated from your promotions must be tabulated so that you understand what channels of marketing work most effectively with the property in question.
  15. When addressing the client or the client group in a formal property presentation, the answers and information you give must be delivered well and provide relevant solid property knowledge, in a practiced and professional delivery. Any sales or presentation tools relative to the property must be relevant and you should know how to use them with exceptional skill. Fumbling and faking information is not tolerated by the client.

So there you have it. These are some of the key skills to use in a commercial real estate presentation. Whilst many real estate agents think that they are the best alternative in the market to promote sell and rent commercial property, the reality is they do not get the message across when it matters most in front of the client.

To be the best commercial real estate agent in your area, you must show that you are just so, and you do this in the first 10 minutes of the time that your presentation takes. The client will have formed an opinion by then.

Be prepared to walk away from any demands for discounting that the client or customer demands. In this market they need a great commercial real estate agent providing a great job; discounting is not an option. Show pride in your services and walk away when the client demands discount in marketing or lower commissions.