If you’re looking to divest an unsupportive asset in your portfolio, disposition is often a viable option for many CRE owners looking to optimize their portfolio.
Each phase of the commercial real estate disposition process is essential. That’s why our team of real estate experts has created this blog series, covering each stage of the process. Previous posts in this series include:
- What Is Disposition in Commercial Real Estate? Here Are the 5 Phases You Should Know
- Disposition in Commercial Real Estate: Choose Your Strategy
- Understanding the 4 Types of Due Diligence During CRE Disposition
- How to Effectively Market a Commercial Real Estate Property During Disposition
Once a marketing campaign has been established, and prospective buyers have been identified, the next step in the disposition process is leading negotiations. An objective, effective negotiation process should prioritize your key business points and maximize value—ultimately leading to a stress-free decision.
Continue reading to learn more about the three-part negotiation process we recommend all portfolio owners follow when navigating disposition.
Why Communication Is Important in Negotiations
Maintaining communication between stakeholders is key to obtaining leverage during disposition negotiations.
Maximizing leverage is the process by which a seller and their team create the perception of higher asset value by attracting and comparing multiple offers. In addition to helping you earn more money, utilizing leverage in a negotiation can ensure other favorable deal terms and conditions (like closing costs or the period of time earnest money is refundable).
What does responsive and definitive communication look like during the CRE negotiation process?
- Timely. Responses between clients and their real estate advisors should not languish. Feedback should be constant—no one should wait more than one business day for answers to their needs.
- Documented. All communication should be written and timestamped. Verbal-only communication creates opportunities for misinterpretation.
- Inclusive. Key stakeholders should be in the loop and approve all communication regarding deal terms.
Managing Offers & Counteroffers
As you receive offers, or letters of intent, it’s crucial to understand how to effectively manage them—especially when there are multiple offers at once.
With your trusted real estate advisor, you should first evaluate the legal, economic, and business real estate terms of the proposals to confirm all stakeholders are on the same page.
Once a collective understanding is reached, the next step is to explore the strengths and weaknesses of each offer.
When managing offers, consider both qualitative and quantitative factors:
- Purchase price. Negotiated amount the buyer is willing to pay for the property.
- Escrow amount. A legal arrangement in which a third party, often known as an escrow agent, temporarily holds funds until the disposition is complete.
- Length of due diligence period. Consider the four types of due diligence and the responsibilities of all parties involved.
- Allocation of closing costs. Closing costs can vary by region.
- Financing contingencies. How long does the buyer have to secure financing? What sort of documentation will you require?
- Buyer reputation, mission, and potential impact on neighborhood. While this may not be a critical deciding factor for corporate sellers of real estate, public sector sellers must consider these qualitative factors when comparing buyers’ offers. How will the chosen buyer have an impact on the community as a whole?
When presenting counteroffers, Allegro Real Estate Brokers & Advisors recommends negotiating all offers, if possible. As the seller, you may have the ability to assess multiple offers at the same time, depending on the disposition strategy you initially chose. Ultimately, the goal is to receive the best terms and conditions possible for each offer before selecting the most lucrative buyer.
Note: All terms need to be outlined and each prospective letter of intent should represent the full terms of a proposed negotiated transaction.
Transitioning From Letter of Intent to Purchase and Sale Agreement
Once a decision is made on the fully negotiated letter of intent, it is time to share the proposed terms with your legal counsel to incorporate into the drafting of the purchase and sale agreement.
The purchase and sale agreement is a binding legal contract that solidifies a real estate transaction, in this case a disposition, between the seller and buyer. In the closing and documentation phase of disposition, all parties will finalize the transaction documents and execute the transaction.
It’s difficult to deny the complexity of many CRE processes, disposition included. Complex doesn’t have to mean difficult, however, especially when it comes to negotiations.
The negotiation process can be broken down into three steps:
- Maintaining communication to ensure maximum leverage.
- Managing proposals, offers, and counteroffers.
- Finalizing terms and drafting agreements.
And when you’re ready to get started with your negotiations, it’s always recommended to enlist the help of a commercial real estate advisor like those at Allegro.
Learn More Strategies for Unsupportive CRE Assets
Corporate real estate optimization is fundamental to achieving your business goals and responding to new challenges. Learn more ways to address unsupportive assets in your CRE portfolio by downloading our free guide, Portfolio Optimization: The Essential Corporate Real Estate Guide.