Why Commercial Real Estate Negotiations Can Cause Long-Term Delays
Denver, CO Commercial Real Estate
On average, a commercial real estate deal takes much longer to close than most expect — generally much longer than it takes to buy a house. Best case scenario which is pretty rare, maybe you can complete the deal in 30–45 days. However, the typical close is much longer than that. You may see seasons change before having a conclusion to your transaction.
What begins with a simple framework of search, locate, negotiate, contract, execute and close often changes in to so much more. Once you start adding in some professional advisers, like lawyers, bankers, environmental engineers, accountants, appraisers, building inspectors, contractors and commercial real estate agents who all have their thoughts and opinions, you see how complex a commercial real estate deal can get.
When you start hitting these snags and delays in the negotiation process, you can throw your expectations out the door. Maybe you were hoping to open your doors in 6 months, but now it’s looking like it will be closer to a year. Many things can happen in the process that holds up the result, and we wanted to share some of the more common issues:
Commercial Real Estate Search
Finding the right space for your business can be hard. Over the past few years, many industrial buildings have been occupied, making spaces a little more difficult to find. Chances are that whether you are looking to start a new business or relocate your current one, you might be scrambling to find a spot. Finding the right spot for your business can cause major delays, especially if you are in a rush. With the reality being that it could take months, it is always best to hire an experienced, local broker, to aid you in your search. Hopefully, this can help you avoid some unwanted setbacks.
Negotiations
Commercial real estate negotiations are typically rough waters to navigate. There are many different things that can happen throughout the negotiation process that can lead to some pretty major delays in your timetable. Trying to agree on price, date of occupancy, TI reimbursements, rent increases, CAM expenses and other hot topics for leases, can be hard! It can require going back and forth multiple times before settling on terms everyone can agree with. Sometimes it might end in a split, and you are back to square one looking for a new property. This can happen even with a skilled negotiator, so make sure you are on the same page as your broker through the negotiation process so you can try and keep delays to a minimum.
Due diligence
This is a rather important piece of the puzzle. Once you have made it through the real estate search and negotiations, you come to the point of due diligence. Basically, you need to figure out if you can buy the property. This will include a wide array of third-party reports to investigate all whole bunch of details — appraised value, environmental history, condition of title, roof, air conditioning, structural, seismic, biological, zoning, permitting — to name a couple.
Most commercial real estate transactions will be structured with a timeframe in order to complete these tasks, however; rarely is that timeframe generous enough to all for everything to be completed within it. Remember, all of these reports will require some combination of ordering, investigating, reporting, reviewing and approving. One slip in schedule can cause unexpected delays which can majorly impact your business’ timeline.
Financing
When it comes to financing options, many small business owners will use the Small Business Administration for commercial real estate purchases. There are one to two approvals needed, depending on the size of the loan and lender preferences. They will require one form the bank and one from the federal government. However, this path can have its own set of problems.
For example, when there was a government shutdown in December of 2018, all SBA loan approvals stopped. If the loan wasn’t in the queue before the shutdown, then it had quite the delay. Unfortunately, you and your purchase operate on the loan’s timeframe. Sometimes, when it comes to financing, there can be delays you cannot predict or avoid. So it is best to prepare for some additional time through this process.
City approvals
Virtually any change that you have planned, as well as the use of the property, will all need to be approved and vetted by the municipality. Never underestimate the length in time in can take to get through the city offices. This can be anything from putting in an office, power, warehouse racking, freezer space, etc. Almost anything you do will need approval even though the lease may have been signed by this point. It is hard to be able to know fully what to expect from the city, but with the help of an experienced broker you may be able to have some foresight into what you can expect, and plan accordingly when signing a lease.
Transition planning
Perhaps you are not a new business trying to open, but a current business looking to relocate. You may face some unforeseen issues and time constraints. It can always take longer than you expect, and any additional time you are spending in the transition, can burn cash and means more time that you are not open for business. Make sure to plan accordingly.
Final thoughts
It can be difficult to try and plan for all the ways that your timeline can be altered throughout the process of completing a commercial real estate deal. Trying to plan ahead for these changes is a good way to help plan for as many as you can. Always expect that the process will take more time than you think. Make sure that you surround yourself with experienced professionals that can help you along the way.
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