With Halloween a mere two days away and trick or treats primed for an onslaught by excited youth, I thought it fitting to recant some of the scariest things I’ve witnessed in commercial real estate transactions.
This is my 39th Halloween as a real estate broker. I’ve witnessed PLENTY of scary things, which should qualify me as some sort of an expert. We will go with that anyway.
So, here goes, in no particular order:
Inspection gone awry
We sold a building a few years ago. During the due diligence period, our buyer left the country and asked my partner and me to engage a building inspector in his absence — which we did.
The inspection proposal was addressed to us and soon commenced. A report was generated and based on the findings (there were no issues identified), the buyer closed the sale deal when he returned.
About a month after he closed escrow, we got a call from his attorney. The building inspector had overlooked the fact that the building had NO AIR CONDITIONING! Fortunately, the building inspector made good and paid for the air-conditioning to be replaced.
Lender sleight of hand
Recently, we entered escrow on a building. (I represented the buyer.)
We negotiated a 60-day loan contingency with the seller at the bank’s request. As we approached our loan approval deadline, the bank decided it wouldn’t close until the buyer received BUILDING PERMITS for the buyer’s tenant improvements, which meant at least a 120-day approval delay.
Fortunately, the seller cooperated and granted us an extension. The deal closed, albeit several months after the original closing date.
Appraisal scare tactics
This happened with EVERY deal between 2009-2011 that I was involved in (or so it seemed!). We solved this in one of three ways; price reduction, increase in down payment, or a combination of the two. What I learned during these trying times was that setting the proper expectations was critically important. I was careful to point out to all concerned that our agreed upon price was SUBJECT TO appraisal – and if the building didn’t appraise, we would have to discuss a solution.
You cannot possibly achieve city permitting for your use by your projected move-in. We are seeing this issue a lot these days as it appears that ALL governmental agencies must grant your occupancy’s approval.
My best counsel is to ANTICIPATE the hurdles that your business will encounter and structure the transaction accordingly.
As an example, if you know your building usage will require a high pile storage permit, communicate this to the building owner early and be prepared to discuss the steps needed to get your permit – which will make your request credible.
It’s September 2008 again
I will NEVER forget the day the music stopped – banks stopped lending, buyers couldn’t buy, and sellers couldn’t sell because overnight their buildings were worth half of the value before.
Say you discover a MAJOR undisclosed issue – structural, environmental or financial. If you discover the issue during due diligence, you generally have the ability to cancel the transaction without penalty.
Once your contingencies are waived, you can generally cancel with a penalty. If you discover the major issue after you become the owner or tenant, you should consult a good real estate attorney as warranty rules and recourse against an owner vary by state.
Right building wrong broker
I represent an owner who had a falling out with his previous broker. You, as the occupant or owner, can choose who you want to represent you – period. If you discover that you are obligated to PAY your previous broker (you signed a lease and he repped you and you want to renew), you can still choose other representation – although it might cost you a bit more.
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.
