Understanding the Real Estate Transaction
By: Monty Spencer, CEO
Although negotiation times vary, there are principal steps that occur as part of the real estate transaction that parties involved can expect to see.
To begin, the buyer and seller must agree upon a realistic, market-supported starting point for price negotiations. Both parties should be amenable to a confidentiality agreement before exchanging proprietary information. The buyer must be prepared to provide the seller with a list of reports/information needed in order to perform a thorough evaluation of value. Both buyer and seller should be clear about any extenuating circumstances that may require an adjusted transaction timeline such as tax considerations, third-party inspector availability, financing issues. The buyer should provide the seller with an LOI or a PSA. Once provided, the seller should consult with an attorney and counter with any desired changes in order to begin a formal negotiation. Once terms are agreed upon, both parties sign, and buyer deposits earnest money as outlined in the PSA. At this time, the process would move to the due diligence period.
Sellers should expect a due diligence period of 30-60 days followed by a closing period of 30 days. During the due diligence period, sellers should expect the following:
Seller’s number one priority should be to continue running their business as efficiently as possible throughout the sales process. Sellers should gather and organize 12 months of financials, operational reports, bank statements, rent rolls, surveys, environmental reports, approved building/zoning plans, list of major improvements.
Additionally, the seller will need to provide access to the buyer and their third-party vendors to complete their due diligence. In most cases, terms regarding access, notice, and confidentiality will have already been addressed in PSA negotiations. The seller should begin focusing on a transition plan for staff, utilities, vendor accounts, equipment, and items that will not convey with the sale.
Buyers have their own set of responsibilities when transitioning into the due diligence period. Buyers are expected to do the following:
Regarding the buyer’s financing (if any), the buyer should have all the required debt and equity lined up and committed. Further, the buyer should perform a thorough review of the facility’s financial and operating reports or have someone lined up who can perform such an evaluation within the constraints of the due diligence period.
The buyer should have third-party vendors vetted and booked to perform any required consultations. Not only must the visits be performed within the due diligence period, but the buyer must allow themselves time to review any returned reports. The buyer should have a clear understanding of the criteria they hope to find after performing their financial and operational reviews.
The goal is to have a simple and seamless sales process that avoids potential problems and delays. To avoid problems, parties should consider the following:
Both the buyer and the seller should have a contingency plan and know where they are willing to compromise should unknown problems arise. It is essential for both parties to do their homework and understand market conditions. Taking the time to research the market including sales comparables, rental summaries, and development pipelines will pay off when it comes time to negotiate a price.
As for transaction times, they can range from 60 days to 120 days (without complications). To avoid frustration, both parties should begin by setting clear guidelines and taking the time to make sure essential items have been addressed.
Transparency by both parties is key to a successful transaction. Both buyer and seller have a vested interest in completing the transaction. If either side experiences an unforeseen challenge, it is highly likely both sides will want to come together to find a solution and salvage the transaction. Having realistic expectations and goals when presented with delays in the process will allow both parties to work together more efficiently.
As seen in other industries, commercial real estate has noted trends that impact change in the market and transactions
Recently, Covid 19 has created challenges for owners that slowed transactions. Moratoriums on raising rents and evictions altered the outlook of many facilities and affected the ability to provide accurate reporting to initiate a sale. 2021 has proved to reverse some of this and shown the resiliency of self storage.
The exuberance of investors who focus on this market sector has increased over recent years. The self storage industry has proved to be an effective hedge on investment dollars for companies and individuals looking for a recession-resistant way to invest their capital.
Proposed tax changes may have a significant impact on the urgency to enter into a real estate transaction. With the uncertainty surrounding capital gains, set up in basis, and 1031 exchange options, sellers may choose to expedite future liquidation plans.
The best advice that could be given to buyers and sellers is:
- Set realistic expectations
- Be willing to do the homework
- Prepare for and be patient through unforeseen challenges
- Bring integrity and transparency to your transaction
Cowles M. “Monty” Spencer, Jr. serves as The Storage Acquisition Group’s President & CEO. Monty is an accomplished real estate executive with over 20 years of commercial real estate experience. He has won numerous CoStar® Power Broker of the Year and Commercial Real Estate Council Awards, as well as winning the Deal of the Year Award & Broker of the Year Awards for three consecutive years. Distinguished throughout the industry for developing dozens of high-profile retail projects, Monty has brought his unique blend of expertise and ambition to spearheading The Storage Acquisition Group. He received his BA from the University of Mississippi in Business Administration & Marketing.