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In the last quarter of 2012 CMS was hired by a TIC group to find a structured purchaser for a group of 9 office buildings in the Western US. The buildings were located adjacent to a large corporate campus for a Fortune 500 firm. Additionally, the Fortune 500 firm leased over 70% of the space in those buildings.
Selling the property presented several challenges:
1. The property was running a negative cash flow and would shortly need a cash infusion to continue to make the debt service payments
2. The current appraisal approximated the mortgage balance
3. A large defeasance increased the obligation to owners
Finding a Buyer
CMS introduced a large REIT that was interested in purchasing the property. The REIT needed to have discussions with the Fortune 500 tenant that occupied the majority of the space in the buildings. If the tenant was planning to stay and extend the lease, the REIT would be interested in purchasing the property.
In meeting with the tenant, CMS and the REIT were informed that the tenant was exploring alternative options that were also adjacent to its corporate campus, and an additional option to build an auxiliary campus in another state. Furthermore, the Fortune 500 tenant was interested in owning as opposed to leasing.
The mission to sell the property now had to be focused on selling the property to the Fortune 500 tenant instead of a third party purchaser. In addition, the tenant was already in discussions concerning the alternate sites that would compete with the current location of the TIC owned property.
At the very least, we had identified a new potential buyer – the existing Fortune 500 tenant.
Negotiating a Sales Price
As identified above, a current appraisal indicated that the value approximated the amount of the outstanding mortgage balance. This was in line with recent real estate purchases by the tenant in the area during the preceding 2 years.
In addition, as also identified above, there was a large defeasance — that if not reduced or assumed — would preclude the TIC owners of realizing any proceeds from a sale of the property.
Results
1. CMS negotiated a sale of the property for a significant premium over the appraisal amount, and a significant premium over recent sales in th sub market.
2. The sale included full assumption of the loan and defeasance responsibilities.
3. The removal of the defeasance responsibility was directly responsible in obtaining a significant cash payout for owners.
Lessons
1. Ownership needs to take an active interest in regards to the objectives and intentions of their customers – the tenants. Plan ahead for tenant rollover. You may be able to avoid lease expirations, or at least begin to start lease renewal or replacement discussions earlier.
2. Ownership needs to maintain active and fluid cash flow forecasts. If the need for new capital can be projected, you can start such discussions earlier.
3. Always maintain a Plan B to address potential changes / threats to your business plan
4. Engage third party professional advice for review of your plans. The third party advice should come from full service real estate firms that can provide lender / special servicer discussions, introductions to new capital providers, introductions to the very best legal advice, and introductions to qualified purchasers that can provide the continued benefits of owners wishing to maintain their 1031 tax deferred status.
Summary
In today’s Commercial Real Estate (CRE) environment, most solutions require more than one skill set. Asset / property management firms often do not have the expertise to conduct lender negotiations.
The answer is to use full-spectrum professional firms that can develop and manage a multi-faceted solution to maximize the value of your investment.