Today I get to put on my David Letterman and discuss the top 10 reasons why commercial real estate deals fail to close.
As I have explained ad nauseam in this column, commercial real estate transactions are simply rentals or purchases. We differ from our residential peers in that a significant percentage of our transaction volume is leases.
More precisely, certain agents carry out their entire lease negotiation activity either in renewal mode, directly, or in subletting. These professionals are known as “tenant representative” brokers because the majority of their work takes place on the tenant side.
In particular, with the rise in interest rates over the past year and a half, we have seen a decrease in sales, in favor of leases. Fortunately, a commercial occupant has a choice! Additionally, this year the industrial sector presents a plethora of subleasing activity: an occupier no longer needs the space from which it operates and must find a substitute to fulfill its obligation.
Today I’m going to shed light on the top 10 reasons why these deals (sales and rentals) fail to close.
Financing Issues: Difficulty obtaining financing or unexpected changes in loan terms can jeopardize a transaction. Issues such as a lack of funds, rising interest rates, or strict loan requirements may lead to the transaction being terminated.
Due Diligence Issues: Discoveries made during the due diligence process – whereby occupants are required to investigate a property during a free review period – such as environmental issues, zoning violations or property defects, may lead to buyers to abandon the transaction or renegotiate the conditions.
Title Issues: Title defects, unresolved liens or disputes over real estate ownership can delay or derail a commercial real estate transaction.
Valuation Deficiencies: If the property is valued at less than the agreed upon purchase price, buyers may struggle to obtain financing or seek to renegotiate the terms of the transaction.
Environmental Issues: Environmental contamination or concerns about potential liabilities related to hazardous materials on the property may make it difficult or impossible to close a sale or lease.
Legal Challenges: Legal disputes, such as zoning violations, boundary disputes or recorded lease agreements, can delay or derail a commercial real estate transaction.
Market Volatility: Changes in market conditions, such as uncertainty, changes in supply and demand, interest rate fluctuations or economic downturns, can impact the viability of the agreement and lead the parties to reconsider their positions.
Renegotiation attempts: A party may attempt to renegotiate the terms of the agreement once an agreement has been reached, resulting in an impasse and possible failure of the agreement if both parties fail to reach a satisfactory resolution . We usually see this once an occupant has done their due diligence and found a problem.
Contingencies: Contingencies outlined in the purchase agreement, such as selling another property or obtaining necessary permits, may not be satisfied within the specified time frame, leading to a cratered transaction.
The buyer or seller gets cold feet: Sometimes, one party may simply change their mind or lose confidence in the transaction for personal or business reasons, leading to the transaction being canceled. We once had a break in purchasing requirements because he contracted Covid-19. This made him rethink his entire life and business.
Not in the Top 10, but the problem is that sometimes you don’t see it coming! But boom, there it is. Death of a manager, collapse of the financial system (2008, pandemic in 2020), or sale of a company during your negotiations. Yes! We have seen all this.
Allen C. Buchanan, SIOR, is a principal at Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.
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