Making the Corporate Cut
These guidlines will help industry professionals win big business.
Working with corporations can be challenging, rewarding, and profitable for commercial real estate professionals. However, there are special considerations in securing corporate business and making sure that corporate clients’ unique real estate needs are understood, appreciated, and addressed.
The first step to working with corporations is learning how to secure business. Once a corporate relationship has been established, commercial real estate professionals can strengthen it by being sensitive to the specific needs of the corporation. By partnering with a corporation, commercial real estate professionals can become strategic partners in evaluating potential real estate acquisitions and helping corporate clients assess risk and establish economic predictability. Focusing on a few specific concepts can help commercial real estate professionals form solid corporate partnerships that can generate business for years to come.
Making an Impression
Corporations often solicit requests for proposals when seeking outside commercial real estate expertise. The RFP process is an excellent opportunity for industry experts to introduce their services and market directly to potential clients. Even if the response doesn’t lead to a partnership, a solid proposal potentially can open doors for future opportunities.
Unfortunately, many respondents fail to fully capitalize on the RFP process, limiting their ability to make a good first impression and secure business. When responding to RFPs, commercial real estate professionals always must reply in a timely fashion. RFP deadlines often are tied to a corporation’s internal decision-making timelines. Commercial real estate professionals also should ensure that their responses don’t miss the mark by being nonspecific, poorly executed, or incomplete. Providing canned marketing material that doesn’t address a project’s specific characteristics is always a mistake. The target corporation may assume it will receive the same cookie-cutter service reflected in the RFP.
Corporations generally request specific information in the RFP and expect a complete response. For example, an RFP may request information about the respondent company’s diversity policy. This question may not seem relevant to the respective project and it may be tempting to leave it unanswered. However, many companies have internal guidelines reflecting their corporate responsibility objectives. Failing to respond sends the wrong message about the level of commitment and service the corporation can expect. A poor response also may preclude the RFP from further consideration.
Corporations often acquire real estate as part of broader business or asset acquisitions. Commercial real estate professionals can guide the corporation in considering the implications of the real estate portion of the acquisition. A deliberate approach to acquisition is important because real estate ownership can be costly for corporations. Unnecessary real estate ownership is a waste of precious company resources, and real estate often is seen as a depreciating asset. It can tie up capital and requires maintenance, insurance, and management resources. In addition, a property may carry unrecognized environmental or other long-term liabilities. Commercial real estate professionals who focus on real estate needs early in the process can help the corporation avoid the common real estate “hangover,” which can follow a broader acquisition of assets.
Even where real estate assets are a tag-along consideration to a larger asset acquisition, due diligence should be just as thorough as in a stand-alone real estate transaction. Unfortunately, many corporations do not give proper consideration to that aspect of an acquisition. Commercial real estate professionals can add value by prompting the corporation to apply the appropriate level of scrutiny. The evaluation of corporate clients’ real estate assets should begin with whether the corporate client wants the real estate involved in the larger deal. For example, commercial real estate pros should examine if a newly acquired property is an excess and unnecessary capacity. If unneeded, they should determine if the assets are located in areas where there is market growth or the possibility of sale for redevelopment. If sale for redevelopment is an option, they should prompt the corporation to consider if the property meets the necessary zoning or other development requirements or if the assets carry significant environmental or other liabilities.
If the asset is redundant of current holdings, cannot readily be deployed within the company, would require environmental remediation, or is not re-marketable for other reasons, there are several strategies commercial real estate professionals should consider to carve certain assets out of the larger acquisition. They can do this by demanding a price adjustment from the seller, asking the seller to provide or fund environmental insurance, requesting indemnity or remediation protection from the sale, or insisting on post-closing escrows from the seller or third-party guarantors. Commercial real estate professionals are protecting the corporation’s best interests by guiding the decision makers to carefully consider its needs and avoid acquisition of unwanted real estate.
Securing a Deal
Corporations require predictability regarding the timing and economics of real estate transactions. Defining the parameters of a deal — or bookending the transaction — is necessary for a corporation whether it is buying or selling. Commercial real estate professionals aware of this need for predictability can help by providing a framework for evaluating the sale or purchase. They also can help the corporate client focus its negotiations to achieve the desired level of predictability.
Economic Predictability. A corporate real estate client must be able to accurately predict the total costs associated with a transaction, including potential liabilities and maximum exposure. Corporations typically should close the books on deals within a specified time frame. These time frames can be related to tax findings or earnings reports and are of critical importance to the corporation.
Commercial real estate professionals can support the corporation’s requirements by suggesting strict limitations on liabilities and indemnities that survive closing. A corporation can limit and define its exposure by limiting the time the indemnity or liability will survive after closing and contractually limiting the total dollar amount of exposure. Commercial real estate professionals should encourage corporate clients to include exculpation clauses that directly or indirectly protect related parties or entities from liabilities related to the transaction.
Corporations can conduct transactions through one or more single-purpose or single-asset entities. SPEs exist solely to purchase, hold, and sell assets and raise specific issues regarding indemnities to be considered. When a seller holds its property in an SPE, the buyer may want to require that the SPE retain a certain dollar amount of assets through the expiration of indemnity or other liability period. Alternatively, a buyer can request the seller to provide a guarantor. Otherwise, after a seller has emptied its SPE of the real estate asset, the SPE is an entity without assets and essentially is judgment proof.
To track and model the return on investment, meet tax reporting requirements, and report and distribute the transaction’s net proceeds, corporations may want to limit the time and scope of any economic obligations that survive closing. For example, post- closing tax liabilities, leasing commissions, tenant improvement costs, and the distribution of delinquent rent can all delay post-closing economic finality. When post-closing reparations are unavoidable, commercial real estate professionals should suggest a time limitation that meets their client’s needs.
A seller also can gain predictability for exposure to liabilities after closing by selling a property as-is. An as-is sale forces the buyer to conduct its due diligence carefully and consider any negative aspects of the asset when making its offer or providing a nonrefundable deposit. On the seller’s side, commercial real estate professionals may suggest the seller insist on an as-is sale to protect the seller from the buyer’s post-closing claims. However, a buyer may attempt to negotiate an exemption from a true as-is sale. For example, a buyer may request an environmental indemnity from a seller in an otherwise as-is deal.
Escrows and Indemnities. Both escrows and indemnities, by their nature, survive closing and are not ideal for buyers or sellers who seek economic certainty at or near the closing of a transaction. Escrows have the additional disadvantage of requiring post-closing management, claims, and accounting and greatly increase the likelihood of a post-closing and potentially costly dispute. If indemnities are included, both parties may want to strictly limit the breadth of those indemnities and the time frame during which parties may raise post-closing claims.
Limiting Liability. A seller may make contractual representations and warranties to a buyer; however, a buyer can’t accept them as a substitute for its own due diligence. A seller should limit its representations to information the buyer couldn’t learn through its own due diligence. A seller may want to further limit its representations and warranties to only information in its exclusive control. For instance, a seller will not warrant title to property it is selling because the buyer should have conducted its own evaluation of title. In another example, a seller may be aware of a brewing dispute or proceeding related to the property. Because it is unlikely a buyer would have learned about this potential liability through its own investigation, a buyer may request a representation saying there are no issues related to the property. In turn, the seller should limit its representations to pending actions it has actual knowledge of and put them in writing.
A buyer also may want a representation included that says the seller has provided copies of all leases, lease amendments, and other documents reflecting changes in lease terms. Sometimes, a seller offers tenant estoppel letters in lieu of certain lease representations. These letters confirm the existing tenant’s current lease terms and include a representation from the tenant that there is no current default or dispute with the landlord/seller. When there are multiple tenants, the seller often provides letters only from a specific percentage of tenants or just certain required large or anchor tenants. Of course, the buyer will want to negotiate for estoppel letters from as many tenants as possible.
Commercial real estate professionals should help an acquiring client secure the broadest possible representations and warranties from the seller. Doing so can help manage risks of a buyer’s incomplete or incorrect due diligence. When a seller has made a representation that is found to be false or cannot be remade by the seller at the closing, the buyer typically can walk away from the deal. The buyer can choose to close but will be waiving any claims related to that issue. After closing, if the buyer learns that the seller representation was untrue, the buyer can bring a post-closing claim for damages against the seller.
The best way to secure and maintain a corporation’s business is to become known as a valued strategic member of the corporation’s team. Commercial real estate professionals can build strong partnerships by understanding and actively assisting corporate clients in achieving their business goals. By taking the time to understand the practical considerations of a corporation, commercial real estate professionals can set themselves apart from the competition and build long-lasting relationships.