Today, I must get my David Letterman on and discuss the Top 10 reasons commercial real estate deals fail to close.
As I have discussed in this column, ad nauseam, commercial real estate transactions are simply leases or purchases. We differ from our residential brethren, in that a large percentage of our transaction volume is leases.
Specifically, some agents ply their entire trade negotiating leases either in renewal, direct or sublease fashion. These professionals are known as “tenant rep” brokers because the majority of their work is on the occupant side of the table.
Notably, as interest rates have risen over the past year and a half, we’ve witnessed a reduction in sales, to the benefit of leases. Fortunately, a commercial occupant has a choice! Also, present in the industrial arena this year is a plethora of sublease business: an occupant no longer needs the space from which they operate and must locate a surrogate to fulfill their obligation.
Today, I’ll illuminate the Top 10 reasons these deals — sales and leases — fail to consummate.
Financing issues: Difficulties in securing financing or unexpected changes in lending terms can jeopardize a deal. Issues such as insufficient funds, a spike in interest rates, or stringent lending requirements can lead to deal termination.
Due diligence concerns: Discoveries made during the due diligence process – that free look period occupants have to study a property – such as environmental issues, zoning violations, or property defects, can cause buyers to walk away from the deal or renegotiate terms.
Title problems: Title defects, unresolved liens, or disputes over property ownership can delay or derail a commercial real estate transaction.
Appraisal shortfalls: If the property appraises for less than the agreed-upon purchase price, buyers may struggle to secure financing or may seek to renegotiate the deal terms.
Environmental issues: Environmental contamination or concerns about potential liabilities related to hazardous materials on the property can complicate or prevent a sale or lease from closing.
Legal challenges: Legal disputes, such as zoning violations, boundary squabbles, or recorded lease agreements, can delay or derail a commercial real estate transaction.
Market volatility: Changes in market conditions, such as uncertainty, shifts in supply and demand, fluctuations in interest rates, or economic downturns, can impact deal viability and cause parties to reconsider their positions.
Renegotiation attempts: One party may attempt to renegotiate deal terms after an agreement has been reached, leading to a stand off and potential deal collapse if both parties cannot come to a satisfactory resolution. We’ll typically see this after an occupant has completed their due diligence and found an issue.
Contingencies: Contingencies outlined in the purchase agreement, such as the sale of another property or obtaining necessary permits, may not be met within the specified timeframe, leading to a cratered deal.
Buyer or seller gets cold feet: Sometimes, one party may simply have a change of heart or lose confidence in the deal for personal or business reasons, leading to deal cancellation. We once had a buy requirement pause because he contracted Covid-19. This caused him to re-think his entire life and business.
Not among the Top 10 but certainly a thing is sometimes you just don’t see it coming! But boom, there it is. The death of a principal, collapse of the financial system (2008, a pandemic in 2020), or a company is sold during your negotiations. Yes! We’ve seen all of these.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at [email protected] or 714.564.7104.