There are countless reasons why real estate deals fail. Many focus on finances and the property itself. (Getty Images/iStockphoto)
Today we have to bring in David Letterman to discuss the top 10 reasons why commercial real estate deals don't close.
As we've discussed many times in this column, commercial real estate transactions are simply leases or purchases. What sets us apart from residential real estate agents is that the majority of our transaction volume is leases.
Specifically, some agents specialize in negotiating leases on a renewal, direct, or sublease basis. These professionals are known as “tenant-representative” brokers because the majority of their work is tenant-side.
In particular, rising interest rates over the past year and a half have reduced turnover in favor of leasing. Fortunately, commercial tenants have options, and subleasing has been thriving in the industrial sector this year. Tenants no longer need space to operate their business and must seek representation to meet their obligations.
Today we are going to reveal the top 10 reasons why a deal, such as a sale or lease, doesn’t close.
Financing issues: Difficulties obtaining financing or unexpected changes in loan terms can jeopardize a deal. Issues such as a lack of funding, rising interest rates, and strict lending requirements can cause a deal to fall through.
Due diligence concerns: If environmental issues, zoning violations or defects in the property are discovered during the due diligence process (a free inspection period during which prospective buyers are required to inspect the property), this could lead to a buyer walking away from the deal or renegotiating the terms.
Title Issues: Title defects, unresolved liens, or disputes regarding property ownership can delay or derail a commercial real estate transaction.
Under-appraisal: If the property is appraised at a lower value than the agreed upon purchase price, the buyer may have difficulty obtaining financing or may seek to renegotiate the terms of the deal.
Environmental issues: Concerns about environmental contamination or potential liability related to hazardous materials on the property can complicate or prevent a sale or lease from being concluded.
Legal Challenges: Legal disputes such as zoning violations, boundary disputes and recorded leases can delay or derail a commercial real estate transaction.
Market Fluctuations: Changing market conditions, such as uncertainty, shifts in supply and demand, interest rate fluctuations, and economic downturns, may affect the viability of a transaction and force the parties to reconsider their positions.
Attempted renegotiation: After an agreement has been reached, one party may attempt to renegotiate the terms of the deal. This can result in a stalemate and the deal falling apart if both parties cannot come to a satisfactory resolution. Typically, this occurs after the tenant has completed their due diligence and discovered the problem.
Contingencies: Contingencies written into the purchase agreement, such as selling another property or obtaining necessary permits, may not be met within the specified time frame, causing the deal to fall apart.
Buyer or seller balks: In some cases, a deal may be cancelled as one party simply changes their mind or loses confidence in the deal for personal or business reasons. At one point, his purchase requirement was suspended as he had contracted COVID-19. This caused him to rethink his entire life and business.
While not in the top 10, the unexpected does happen from time to time. But suddenly, it happens. A CEO dies, the financial system collapses (2008, 2020 pandemic), or the company is sold during negotiations. Yes! We have seen it all.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange and can be contacted at abuchanan@lee-associates.com or 714.564.7104.