Amid the ongoing turmoil in capital and employment markets and broad economic uncertainty, opportunities involving distressed commercial real estate are emerging both nationally and locally. For "bottom feeders," those opportunistic buyers who seek to take advantage of the disposition of assets by financially troubled owners, the challenge is to narrow the perceived bid-ask margin. To accomplish this, bottom feeders may consider shouldering transactional expenses and offer seller-friendly contractual provisions detailed below, all intended to facilitate, from the seller's perspective, an accelerated and more certain liquidation.
Bottom feeders can ease a seller's pain by offering condensed contingency periods to facilitate a quick closing (possibly thirty days or less). Engagement of trusted and committed inspectors, engineers, and attorneys is critical to ensure that due diligence concerns are satisfied within the short timeframe. This approach may force buyers to bear the risk of closing without a survey, or settle for a dated survey, with an update, if timing and lenders permit. If development permits are needed, the accelerated approach is unlikely to work unless the buyer is willing to accept the risk of getting permits post-closing. Timing also may not allow for tenant estoppels to trickle in, so evaluation of seller's lease documentation is crucial. Distressed sellers will want contingencies removed expeditiously, as a late inning termination right could result in financial ruin. All of these circumstances underscore why the opportunistic buyer must doggedly measure and temper risk throughout the transaction.
In exchange for what they perceive as a discounted price, distressed sellers will also expect to limit, if not eliminate, future liability risk. So, bottom feeders should expect to proceed with few, if any, representations or warranties regarding the property's physical condition. Sellers may not be willing to indemnify buyers for liabilities arising before seller's period of ownership, while expecting to be indemnified for future liabilities. Environmental conditions will require close examination during a potentially shortened due diligence period. Any complications on that front will likely delay closing and threaten the deal. Public records should be scoured for third-party security interests, pending lawsuits, and claims against the property that would not appear on a preliminary title report. What all this says is that the sale will be AS-IS in the strongest sense.
Bottom feeders should present distressed owners with comprehensive financial packages, including lender or investor commitments, financial statements, and credit history, which alleviate credit concerns and demonstrate the investor's ability to close the transaction.
Finally, if the opportunity is favorable and the seller looks broke, the buyer should consider covering some closing costs typically paid by the seller. These could include the owner's title insurance policy premium, all or a portion of any loan prepayment penalties, recording and escrow fees, and broker commissions. But, look to cap this commitment at an amount reasonable for the transaction. To further narrow the bid-ask margin, bottom feeders may offer heartier earnest money deposits, with a portion going "hard" upon removal of contingencies. All this may soften seller's dissatisfaction with a lower purchase price.
Today's market presents what some experts have called "a once in a generation" best opportunity to purchase real estate. However, it won't come without some risk and some strings attached.
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