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Post Mortem – Case Study of a Commercial Real Estate Deal Gone Bad
Recently, a deal which had been in the works for nearly 3 years went bad. The deal was complex, so there was always a lot of uncertainty to it but it we had gotten to the point that we had scheduled closing 5 separate times and ultimately, it did not close.
While it wasn’t a small deal, it also wasn’t a large deal (approximately one half million dollars) so it was unusual for it to take so long. The reason it was so complex is that it involved several parties and several smaller transactions as well as some specialized financing and a non-profit entity. As the makeup of some of these parties changed and as the business environment also changed, it was challenging to keep all of the parties together. This meant that the nature of the deal had to change several times.
the fatal problem with this deal involved the financing. In today’s environment, financing is a problem for most commercial real estate sales. Money is hard to get. One strategy which improves your chances to sell your property is to offer financing for the project. Such was the case with this project. The buyers were able to secure financing but the terms of the financing prevented the primary lender from fully funding the purchase. To work with the financing requirements, the buyer turned to the seller and asked if the seller could finance the balance. The seller agreed and it looked as though we were ready to go.
As the lender and the attorneys began to prepare for closing, problems began to arise. The attorney for the seller did not like the financing documents from the primary lender and demanded that they be changed. When the lender refused, the seller’s attorney asked the buyers to change the agreed terms of their financing arrangement with the sellers. The buyers refused. Meanwhile, the contingency period in the contract expired and the contract became null and void. Normally, the buyer and seller could have resurrected the contract except that as the contract contingency period ended, the financing options also expired as did some of the key contract options with other parties. Within a couple of weeks, it became clear that it would not be possible to put this back together.
While both parties might want to suggest that this deal died because of the inflexibility of the other party, the real killer to this deal was time. The longer it takes to complete a deal, the more likely it is that the deal will fall apart.
the other critical lesson of this particular deal is that good legal advice is not always good real estate advice. The seller’s attorney was giving them great advice regarding the loan documents and their enforceability as written. But in this case, this advice amounted to trying to get the tail to wag the dog. While the note by the seller was not small, the seller was getting approximately 85% of the sales price up front. The balance on the note would be paid off within 4 years and the seller had the balance secured by a secondary interest in the property itself. By worrying so much about 15% of the deal, they ended up losing the entire amount.
good real estate advice would have concluded that while this was not a perfect situation for the seller, it is probably the best the seller can hope for in this market. The seller’s property needed extensive maintenance and repair and also had some environmental issues. They had no one else with an interest in the property in spite of the fact that it had been on the market for more than 3 years. In that time, the average value of similar properties had decreased approximately 40%. The sellers do not have the money to maintain the building and more than likely this building will continue to decrease in value over the next few years. Given that scenario, a sure deal with at least 85% up front, should be an easy decision.
This was a difficult situation to overcome. Even though we might see that real estate advice might differ from legal advice, real estate professionals would be in a very tricky situation to suggest that a client should ignore their attorney. In this case, had the sellers agent done that and the secondary loan gone bad, that agent could be held liable, even though it still would have been a better outcome than the deal not happening at all.
This deal was especially frustrating. Over a three year period, i have invested a lot of time. Since i am paid on commission only, that means that i received no compensation for any of that time. On a sale, when we get to the point that we have a closing date, the probability the deal will happen is nearly certain. Never-the-less, i learned a long time ago, that in commercial real estate, you can’t count your money until you get paid.
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