What it takes to make a commercial real estate deal 

Posted: 11:13 am Fri, September 3, 2010
By Owen Rouse Jr.

Real estate transactions by nature pose a number of challenges — some which must be dealt with one at a time and some that must be handled simultaneously. Some discussions may revolve around legal technicalities, title machinations, or ownership structure or tax implications.

Other conversations may be based on technical, science or mechanical consideration. Additional concerns revolve around issues related to use, tenant solvency and the general ability to obtain financing.

Given these challenges, it’s amazing transactions get closed with as little static as they do. Here’s my opinion on what it takes to get a deal done:

Informed underwriting: Underwriting is the process of mapping out the income and expenses of a property while matching this with observations on where the market is and where it is heading. Informed underwriting means a buyer has taken the time to appropriately sample the market and draw fact-based conclusions about its direction.

This takes good market intelligence that is timely, deep in detail and relevant to the transaction at hand. Overly cautious buyers will ignore selected market data, while overly cautious sellers will rank its weight inappropriately. As market data typically is a look back rather than a precise look forward, the art of underwriting is an accurate sense of the prospective market, not a simple extrapolation of the past.

Buyer-appropriate real estate: Buyers tend to cluster in what it is they like to own. This is not to say they don’t stray from their business model, but familiar real estate is just that and it is a lot easier for a buyer to underwrite the familiar and meld it into an existing portfolio.

Size also can come into play as larger deals (i.e. a larger purchase price) mean more risk, more utilization of capacity and today, more difficulty to finance. Does the deal size fit the buyer? Are they willing (and capable) of stretching? Is there “transaction processing power?”

For a broker, the challenge is to know enough about the prospective purchaser to effectively match the purchaser to the opportunity.

Experienced vendors to the transaction: I have seen engineering reports that identify virtually everything they have surveyed as potential future failures requiring price-adjusting remedies to underwrite the catastrophic, seemingly to avoid a liability.

Those who have seen and can offer counsel as to the likelihood of failures, also can offer steps to preserve the assets. These experts endeavor to find ways to make a deal happen, not to kill it, making their counsel far more valuable to their client.

Transaction attorneys who are overly zealous in scribing, or start Socratic arguments with opposing counsel to demonstrate their recall of the minutiae of property law, ultimately stretch transaction time, isolate parties and push a transaction farther out on the ice.

True sellers and capable buyers: Real estate is in writing. This means real listing agreements with brokers, letters of intent that are grafted into real contracts and due diligences lists that are written and followed.

Sellers that offer to the market to get a sense of “where the market is” means they don’t have a sense of where it is and may not really be sellers. Why a seller is selling is always a key to true motivations.

Buyers that lack the experience, team and energy to “march through a transaction” reduce the chance of a deal ever being made. Professional buying of real estate can be psychologically fatiguing and requires focus and a sense of being present in or proximate to the transaction long enough to get it done.

In some instances it may make sense for buyers and sellers to meet to understand each others’ goals, put a face with a name and create a human element to the transaction.

These are the elements at the atomic level that need to be present to get a deal done. This does not include the vagaries of the physical plant, the nuances of tenant credit (current and future) and any management retooling that will be required to get the real estate “running right.”

Keen observation and understanding of the fundamentals at the bottom of a transaction allow success to rise to the top.

Owen Rouse Jr. is senior vice president, director of capital markets at Manekin LLC  in Columbia and can be reached at orouse@manekin.com.