Practical Solutions: Part 1

I recently assisted a real estate investor with the acquisition of two small retail properties in Southern California.  The first property was a single tenant NNN leased building and the other was a small multi-tenant outparcel building.   The client, a first-time commercial real estate investor, decided to obtain a single securitized loan to purchase both properties.   This meant that both acquisitions and the financing had to all close at the same time.  Although the closings all came together as planned, I learned a few important lessons along the way that I would like to share with you…

Lesson #1:  Manage Seller Expectations at the LOI stage.  

There are several schools of thought regarding the right level of detail of a term sheet or letter of intent.  It goes without saying that any LOI that includes a loan contingency will be at a distinct disadvantage in a competitive environment.  However, there is a benefit to including some detail in an LOI that connects the seller to the eventual needs of a mortgage lender.  For example, most lenders will want estoppels from all tenants in the case of smaller assets such as these.  In addition, many lenders will also want a subordination, non-disturbance and attornment agreement from the “major” tenant.  If a client must have debt financing to close and including a loan contingency is not realistic, including these other typical lender requirements “to the extent required by the buyer’s lender” will go a long way toward managing seller expectations during PSA negotiations and beyond.

I’ve found that getting deals done is mostly about using common sense, creativity and people management skills and much less about actual lawyering skill. Finding that critical path toward a successful closing is the ultimate goal but that path is not always well marked, especially when it comes to smaller deals.

Stay tuned for Part Two of this “Practical Solutions” series, People and Personalities Matter!