CCIM Feature

The Art of the Deal

What does it take to close a transaction in today’s market?

Brokers across the country have been working harder and smarter to close transactions as the national economy starts to reignite commercial investment real estate deals. While stabilized class A assets remain in demand, brokers need to prepare to sell the less desired assets in the nation's secondary and tertiary markets.

A host of strategies are being rolled out coast to coast for investment deals at the smaller end of the spectrum in the $5 million to $15 million range. Using auctions to move assets, taking advantage of national broker networks to find buyers for tough-to-sell assets, and prospecting for buyers through social media are all part of the 2011 broker toolbox.

Along with these strategies, nothing is more critical in today's economy than a broker's in-depth local-market and product-sector knowledge, flexibility, and perseverance.

Tell Your Market's Story

Especially in smaller markets, brokers need to know what strengths they have in their market and be ready to tell the story to national investors, because they might come to town, says Robert Bach, CRE, chief economist for Santa Ana, Calif.-based Grubb & Ellis Co.

"A year-and-a-half ago, somebody coined the term yield fatigue," he says. "Investors are tired of paying top dollar for assets in supply-constrained markets. As a result, we're now seeing the bigger investors starting to look at secondary and tertiary markets."

Brokers should know their markets' strengths and national profile. In Indianapolis, for example, it's not likely that institutional investors will be looking around for office properties.

"It's an industrial market," Bach says. "And the national players are going to be looking there."

Good stories also are going to help sell local assets to national investors, he adds. "In Pittsburgh, which was down for 30 years and has held up well in the recession, you're going to find a number of investors ready to take advantage of that market."

But for most assets in the smaller markets, especially in the $5 million to $10 million range, the key to a deal will be finding small banks to finance deals and local entrepreneurs to buy either as investors or users.

"Local entrepreneurs are going to see the things that others are not willing to see," Bach says. "Getting boards and lenders to see those same things is going to be a trick. You need someone local who cares about it."

If there is a lot of work needed in convincing buyers or lenders, local people will be more willing to put in the extra effort, he adds.

But previous buyers are definitely back, according to a recent study by New York-based Real Capital Analytics. The study found that 81 of the 100 biggest buyers from 2006 and 2007 are actively buying today, albeit at lower levels.

The message to sellers: Buyers are out there.

How Is the Capital Stacked?

A trick to getting deals going is to know the financial structure of buildings in the market, says Eric Taylor, senior investment adviser for Phoenix-based Hendricks & Partners. Having information about loans that are maturing can be an indicator of an owner who may need to sell.

"Deals financed in 2003, 2004, and 2005 might have a hard time being replaced," he says. "Something financed on an 80 percent to 20 percent loan-to-value based on an appraisal from another time period is going to have trouble. The owner might have to come out of pocket with a couple million dollars just to refinance it.

"I'm going to see that as a case where there's a motivated seller with pretty good equity in the deal," Taylor adds.

Likewise, an asset's capital stack can work against the selling broker if he doesn't know how all the layers of debt and equity work together, says Michael L. Gerard, chief learning officer for Los Angeles-based CB Richard Ellis.

"You need to educate yourself on what the capital stack means specifically for each asset," he says. "It will have a profound impact on how an asset will trade."

Buildings with elaborate levels of financing that may require investors and lenders to take losses may be much harder to sell if parties aren't ready to take their losses, for example.

In addition, listing brokers need to spend more time doing reconnaissance on buyers, Gerard says. "Qualify the buyers so that you don't have egg on your face at the time of closing," he says.

Setting strict guidelines, such as large deposits, at the time of the call for offers can filter out buyers who aren't as qualified as others. "Ensure that the buyers have the wherewithal to close," he says. "Learn about their history."

People who have done past deals with certain buyers may be able to provide information, so ask around: If you're dealing with someone who backs out of deals at the last minute, you want to know long before the close.

When to Sell

Knowing when not to list an asset can be a key to keeping your deal flow moving, says Robert Horvath, a senior associate and director of the national retail group for Encino, Calif.-based Marcus & Millichap Real Estate Investment Services.

His team has stayed focused on single-tenant, net-leased retail assets, a class that has not experienced much of a downturn.

"From a listing standpoint, we're just going after the deals that have a high probability of being sold," he says. "We're very selective on the deals that we bring to market."

Outside of NNN retail assets, multifamily has been a strong segment in many markets, Horvath adds.

And sometimes it's important to tell a client that now is not the time to sell, says Spencer G. Levy, executive managing director with CBRE in Baltimore, heading up capital markets for the firm.

In representing a client's best interest, a broker needs to have an eye on the value of the asset, he says. For example, there may be a material weakness in the asset, such as some roll in the leases coming in a certain period.

"In some cases, the recommendation is not to sell, because there's a greater value to be found down the road," Levy says. "Instead, list it after the capital improvements are done and the rent roll is stabilized.

"That point is especially important in the current market, he says. Assets in secondary and tertiary markets that aren't stabilized can be difficult to move.

Other options being used right now include the use of auctions to sell assets, which has been a growing segment of business for CBRE.

"It gives people a greater certainty of closing," Levy says. "The value can be equal or greater to a managed bid process. There's no empirical way to know which is right or wrong."

Marketing That Counts

Marketing and the quality of the asset are the two elements that can influence whether a deal will close or not, Levy says.

"You can have the best marketing and the worst asset, or you can have the worst marketing and the best asset," he says. "And a lot of times you end up in the same place.

"It's important to know whether the seller is patient or looking to sell in a hurry, as the strategies can differ. Using more targeted marketing, for example, takes more time and can maximize value. But targeted marketing of assets can be a way to move things more efficiently, especially when there's a small pool of buyers in a market.

"The fear is that by marketing a property quickly, you can hurt the value," Levy says.

Mark Popovich and his team have closed 15 of the last 25 apartment deals in Pittsburgh. A senior managing director in the Pittsburgh office of Holiday Fenoglio Fowler, he says the personal touch on a pitch can be more effective than an e-mail to 200 people.

"We have a pretty good idea of who the buyers are and what they're looking for," he says. "We don't do a cattle call; we do a targeted approach with the willing investors. It's a calmer approach and we're able to talk through the deal."

Social Media Showing Returns

But in some markets, just finding buyers is still a slow process as local economic factors sort themselves out.

In Detroit, for example, national investors have shown some interest in assets, but not much. And many of the local investors are still reeling from the downturn.

For Robert Pliska, CRE, CPA, managing director of the Sperry Van Ness office in Birmingham, Mich., that means keeping himself visible to the potential buyers and being patient for them to be engaged again.

The use of social media is part of that strategy, Pliska says.

On Twitter, for example, he has 3,000 followers. Pushing good news stories on a regular basis and reading deal transaction information from other markets helps him stay on top of things. He contributes to real estate blogs and mines Facebook and Linked­In for leads.

"It's been an efficient way for me to stay top-of-mind with people, maybe outside of the market, who I haven't seen for a few years," he says.

"And I'm starting to get some return on all of it. When I'm out, people will mention that they appreciate something I posted, or that they saw me on Facebook and would like to meet."

He's also been more active with local nonprofit groups, mining the local landscape for people with investment capital ready to be put into real estate.

But overall, Pliska says, the best technique is educating people about the value to be found in real estate and in his market.

"I'm just telling people that this is probably going to be the best time to buy," he says. "With a 40 percent reduction in values and low interest rates, the cap rates are nothing like what investors are finding on the coasts. I tell them: It's time to buy."

Daniel Duggan writes about real estate for Crain's Detroit Business.

Daniel Duggan

Deal Tips The deal: 120-unit multifamily sale in Columbus, Ind. Price: $4.7 million Timeline: Closing occurred 75 days after purchase agreement was signed. The lesson: Buyer changed lending institutions midway through the negotiations. Moving from Fannie Mae to Federal Housing Administration lending means the 50-to-90-day cycle turned into 270 to 300 days. As a result, interim bank financing was lined up while the FHA end loan continues to be processed. "Keep everyone at the table," says listing broker Eric Taylor, senior investment adviser for Phoenix-based Hendricks & Partners. "Keep reminding the seller why they wanted to do this in the first place and keep them patient." The deal: 24,000-square-foot retail strip center in Boston Price: $10.4 million Timeline: Roughly five months from start to close The lesson: Retail assets with high-credit tenants have continued to sell through the downturn. "We're focused on the asset itself," says listing broker Robert Horvath, a senior associate and director of the national retail group for Encino, Calif.-based Marcus & Millichap Real Estate Investment Services. "The type of asset, the quality and the credit of tenants are what we focus on. We take on assets that have a high probability of selling." The deal: 57,000-sf retail with 117 residential units in Pittsburgh Price: $13.2 million Timeline: Roughly five months from start to close The lesson: The seller had an asset that was outside of its core group of investments, making it a willing seller. But with a 25,000-sf tenant's lease rolling in 18 months, there were uncertainties to a buyer. "Identify the players, identify the problems, and come up with a way to mitigate it," says the listing broker, Mark Popovich, senior managing director in the Pittsburgh office of Holiday Fenoglio Fowler. In this case, he adds, mitigating the risk meant making the buyer comfortable that the space can be filled in the event that the tenant leaves.

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