My Property is worth $1 million dollars less.. due to COVID-19 ??

Question

***June 2020 NEW UPDATE***: As a follow-up from my deal in contract below, I am thankful we are still in contract due to Covid-19. But now, the Buyers want to renegotiate a lower purchase price significantly reducing the offer price by more than 20% of the contract price, resulting $1 million+ less from the agreed contract price! There claim is from reason of uncertainty of if and when the economy will ever recover and longer projected time frame in leasing and secure a tenant. Also, they feel the current valuation of the commercial property is no longer fair market value compared from the beginning of 2020, pre-covid-19.

The Seller's are obviously not happy to hear of the news, and most definitely will not agree and accept a 20%+ devaluation of their commercial property. To some degree they understand the financial impact and crisis due covid-19 and the aftermath which will take many months to not only restore general public confidence before a vaccine is readily available, but mostly when the economy will ready for an upswing cycle. Buyer's maybe in a position to leverage and renegotiate a fair price they feel is justified, but Seller's on the other hand are not ready to lose their shirt, give in and settle for a deal they don't feel fair and justified.

Any thoughts or feedback will be appreciated, without a doubt, real estate market has and will continue to be impacted, but do you feel the commercial real estate market has taken a nose dive or a starting a downswing cycle, will this be damage be temporary or permanent? How much is a fair valuation for the commercial property at stake?

***March 2020***
Here is the summary; I am a commercial real estate agent in San Francisco where we are currently in contract ( CAR standard commercial property for sale purchase contract) and I represent both the buyer and seller for a commercial property in San Francisco. Due diligence period (60) days will soon expire in 2 weeks, but due to the uncertainties of virus containment and shelter in place mandates, buyer is now asking for additional (90) days extension in hopes this virus outbreak will subside and then ready to move forward with deal. Sellers now are in a tough position where they would ;

1) obviously move forward with deal and close of escrow as planned sooner.

2) wiling to work with buyers but don't want them to back-out at the end of due diligence period without any compensation for loss of opportunity.

3) Seller are contemplating to ask for a non-refundable deposit from buyers if they choose to cancel the deal and walk away at the end of the (90) days extension.

4) what is fair and reasonable under these circumstances as I don't want to risk the buyer canceling the deal completely, but also don't want the seller end up with absolutely nothing?

thank you for any feedback.

Ricardo

Syed H. · Answer

Not really surprising. Certain commercial properties have lost a lot of value in the short term (especially retail). Many banks were underwriting retail rent as $0 or taking huge vacancy rates. You and everyone can say it'll get better, but that doesn't matter. That's just projections. Comps also mean very little because pre-covid comps aren't really comparable anymore If your seller doesn't have to sell, I'd take it off there market, return their deposit, and re-list at a later date. Honestly, you should speak to someone who is an experienced local CRE broker. I used to be, I was trained by much more experienced brokers. They are much more complicated than what most resi brokers are trained to handle. Most people here aren't qualified to help you with this.

Jai Reddy · Answer

I've seen a property appraisal; in early April 2020, at around 900K less than 8 months ago, and the Appraisor specifically mentioned Covid-19, yada yada.If the property is worth what the Seller thinks it is during this point in time (and taking a future recovery or furthur softening of prices into consideration), Seller shouldn't budge from the price he/she thinks is fair. Same for the Buyer, who should only pay what they think is fair value at this point in time (considering future market movement).Your benefit is only when the deal closes. So, your only job is to get them to agree on a price. Its all about the price. Simple. Just not easy to get agreement on when millions are on the line. Either you scare the Seller into selling now, or entice Buyer to feel greedy in acquiring the property NOW when everyone thinks a recovery/vaccine is round the corner and prices will shoot up. They have to feel convinced they are making a good deal.Please keep us updated.

Kevin K. · Answer

Hello Riki,They are most likely discount the property for lease-up costs now that it is essentially 100% vacant. These costs include, leasing commissions, tenant improvement allowances, rent loss during vacancy period, rent abatement/free rent, etc. However, without knowing the market rental rates, typical TI allowances and the assumed absorption rate (the timeframe to lease-up space), it’s not possible to calculate. Moreover, the purchaser may also be stressing the deal at either a higher cap rate and/or internal rate of return due to the risk of a 100% vacant building. With all that being said, would your seller possible meet in the middle and accept a 10% discount?

Riki Tang · Answer

this is a commercial/retail/Medical use property, half of the building (3,500sf) is owner occupy as a medical clinic and owners will plan to retire. The other half (demised into smaller retail tenants) are current vacant without any tenant, pre-covid 19 they were month to month tenancy. I was hoping there maybe a local CRE broker that would be able to chime in with some experience and or feedback. I also work as restaurant business broker, and with many rounds of negotiations with landlord/property owners, they too were not willing to budge on lower or giving any type of concession to the existing tenants but to offer deferral of rent. There are exceptions where landlords were willing to listen and offer rent forgiveness and or lower rent by about 15-20% for a few months, but most will not likely renegotiate a new lease or amend lease with lower.

Brian Garlington · Answer

Riki Tang ? Wasn't that a character in one of the Rush Hour movies?All kidding aside it sounds like this person has been reading a lot of articles about how CRE is potentially getting hit hard and they are going to squeeze you. Their thought is the longer YOU wait, the worse and more desparate it will get for you.Is it retail commercial or is it residential commercial?

Kevin K. · Answer

Has the property been directly impacted? Is it now vacant retail? There isn’t enough post-pandemic data to make a true quantitative adjustment. With that being said I have seen appraisers adjusting cap rate upward by 25 -50 basis points, adding 50 -100 basis points to current vacancy rates and adjusting overall value downward by 5-10% all based on the anticipation of market conditions. Can you provide more details about the property?

Jared Rine · Answer

@Riki Tang..sorry you're in this situation, but I agree with comments by @Jai Reddy. I was going to ask what type of property, as that may have a play in how you move forward with the buyer and seller, but given the market, it's tough, and while there are so many opinions (and I'm in the CRE lending space) on how long this recovery is going to take, no one really knows. I think it really depends on asset, business type, etc. There are def facets of CRE that haven't been hit as hard, but it's tough right now, on all sides. Good luck. And would be interested in hearing updates.

Theresa Harris · Answer

Look at comps and if the seller doesn't want to renegotiate, then talk to your buyers. They signed a contract (sounds like back in March). The impacts from covid are not going to last forever.