After 25 years in the business, it occurred to me that I might have developed an intuition for knowing a lopsided deal when I see one.
What is a lopsided deal? It’s deal where there’s a big winner and a clear loser. Typically, it is the result of someone not being prepared.
You do not need to be a real estate veteran to know when someone is leaving money on the table – just evaluate the characteristics of the seller, the structure of the transaction, and the property specifications.
Here are the types of sellers who will be leaving money on the table.
- The Non-professional Seller: A passive or inactive owner who didn’t prepare the asset for sale.
- The Detached Seller: They have a low emotional attachment to the property.
- The Rugged Individual: The seller has little or no experts guiding him. Often, professional buyers seek deals where there are no brokers or incompetent brokers.
- The Fragile Seller: The seller is distressed due to being overleveraged, tax consequences, or personal matters.
Sometimes, just looking at the type of transaction will tell you if the deal is lopsided.
- The Portfolio Sale: Multiple properties, different product types, various markets, lots of cats and dogs.
- The Quick Closer: The seller wants to transact quickly, and customary due diligence is not provided.
- The All-Cash Closing: Evidence of little creative deal-making.
- The Syndicated Exit: Multiple sellers with a wide range of interests.
- The Mess: Complex deals with many title issues and encumbrances.
The characteristics of the property will often determine if the deal is going to be lopsided or not.
- The Owner-Occupied Building: Empty buildings are sold to occupiers are slow to sell, and often a speculator will buy it cheaply.
- Class B and C: Class A buildings attract more buyers.
- The Rosebud Hotel: If it is in Schitt’s Creek, there is only one buyer, and he’s broke.
- The Unique Asset: Church’s, contaminated properties, and coliseums present unique marketing challenges.
- The High Maintenance Asset: Management costs and complexity impact value.
- Poor Credit Tenants: Sometimes it’s better if it is empty.
- The Collapsed Market: Questionable Lease rates are above market.
When we’re representing someone, we solve these problems before they go to market. Obstacles get overcome, due diligence is performed, and property is carefully packaged so that the client’s objectives are met.
For example, when I was representing the owner of Mt. Aetna, I learned that we had a significant problem while performing the Cardinal Due Diligence 360™. There was a coal fire raging underground. Before going to market, we hired engineers to investigate the cost to remedy this. The transaction was approximately $25M; spending $10,000 to solve this problem was easy. We hired labor who rented a water truck and a long hose to flood the fire 24/7 for about a week. If we had turned our back on the problem, it would have inevitably come up as an issue at closing and would have instead cost millions.
The Cardinal Due Diligence 360™ is a 221 point commercial real estate due diligence checklist to ensure nothing is overlooked before going to the market. The results are included in our packaging process to ensure that information is deliberately relayed to the market as not to tank a deal.