Thursday, July 22, 2010

Secure the space you can't yet afford

I'm currently engaged in multiple transactions in which a buyer has found THE property they want to buy but they're not financially ready to secure the commercial mortgage they need.  The problem in some cases is that if the buyer simply goes away with plans to tie it up when they're ready, the building may be sold out from under them.  In other cases, the building plays an important part in raising the funds to pay for the building.  There are creative solutions to this scenario so long as a couple of key components are in place.

The key components are critical:
  • the buyer must have a definite and convincing plan for paying for the building by a certain date, and
  • the buyer must be willing to risk monetary loss if they don't get to that financial place.
How does this work?  I'll share three stories here.

Story 1: Needs space now to meet an existing demand
I represent a buyer who has clients teed up and waiting but is unable to meet that demand without a space in which to conduct business and meet with clients. These clients will spend hundreds of thousands of dollars per year for the buyer's services, with great operating margins. 

The buyer isn't able to secure a commercial mortgage because they've been investing heavily to get to this point and this new media company hasn't been around for years to have an operating history.  And the buyer doesn't want to lease because technology installations make a relocation unattractive.  Plus, they strongly prefer to own and they know now is a great time to lock in a purchase price.

This buyer finds the perfect space... it's vacant and available for sale only at a steep discount.  Now what?  The seller is expecting a purchase offer with earnest money and a 60-90 day close period. The buyer can do earnest money but not the loan.

The answer is a lease-purchase agreement with a build-up of earnest money.  The seller leases the property now and puts down a standard lease security deposit.  This arrangement covers the seller's costs in the short term.  At a certain point in the lease - after the buyer has recovered from relocation costs - an earnest money payment is added to the rent.  This earnest money is accumulated over X months and will be applied to the purchase price at closing or will be forfeited if the buyer doesn't complete the purchase in a set time period.  The buyer should also be prepared to convert the security deposit to additional earnest money if the sale isn't completed.  This twist gives the seller security from day 1 and will help motivate the "recovery" period before the earnest money payments kick in.

This arrangement works because (1) it covers the seller's costs on the vacant space, (2) it compensates the seller for lost sales exposure if the buyer doesn't buy, and (3) if the buyer doesn't buy, the seller is certainly looking at a more favorable market in a couple of years.

Buyer 2: Needs space later and needs to raise funds
I represent a seller in a transaction in which a buyer had accumulated a good sum of money (6 figures) towards a building purchase, but this sum didn't cover the equity needed to secure a commercial mortgage.  As a charitable organization, this buying organization needed to raise funds to complete the purchase but they needed a "poster building" to attract donations. 

The buyer found the absolute perfect building (my client's).  The building was occupied by the client but the client would vacate upon sale.  The significance of the occupancy is that the seller was covering the operating costs through their own business use.

What the buyer did was to provide their entire warchest as earnest money to secure the property.  They then went through a standard inspection period followed by an unusually long closing period of several months.  They used these months to promote the vision and show the property to donors.  It was a gutsy move because their warchest was nonrefundable at the end of the inspection period, but they've flourished in their fundraising and they'll soon be proud owners of a great new headquarters building.

Story 3: Needs space now, Business windfall later
In a huge gamble, a startup production company needed a building in which to do television filming and other production-related work.  As with Story #1, they anticipated a huge payout once the business was up and running, but they couldn't get the business up and running without a facility - a very large on in their case.  What they did was similar to story #2, except they did it with a vacant building.  They made a full-price offer, put up an unusually large amount of earnest money to secure the building, and then scheduled the closing 12 months out.  With a seller who doesn't need the space themselves, this is a great solution.  Once the earnest money goes hard it covers a good portion of the expenses for a year.  If the buyer doesn't buy, the seller gets back an improved building that's been customized for a rapidly-growing industry in Georgia.  And most importantly, if the buyer doesn't buy the economy will be one year farther through the recession!

These are only three of many creative solutions to problems of this type.  Feel free to call if you're in a similar situation... I'd love to help!

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