negotiations with developers - anyone with experiences to share?

Question

Have any of you owned an older commercial property and been approached by a developer looking to purchase it for re-development? If so, can you describe the experience and any insights you gained from the process or things you wish you had known earlier in the process.

Joel Owens · Answer

Biggest thing with developers is to not let them tie up the property for a long time for nothing. If you are going to sell make them have a timeline to it. Have non-refundable earnest money that keeps growing with contingencies in the original agreement and with each extension they ask for.Have a (right to continued marketing clause ) where you can kick out their offer if they do not perform. They likely will want a ROFR (right of first refusal) to match other offers.

Joel Owens · Answer

First you need to determine the experience level of your broker versus the experience level of the developer trying to buy your property.Is it a small developer partnering with a larger one? Do they have to get multiple partners involved to buy your property? Are they paying all cash or putting some down?Do you have a 1031 exchange clause in your contract so you have the time to find a suitable replacement property? Have you calculated out your tax penalty amount if you do not 1031 exchange?Looking at the current and future land use map is what the developer proposing with density and use conforming for the area? If not it could have resistance from zoning. If you are urban core then you usually can sell the land for a lot more per acre as they can build up for larger projects.

Jeff Glinski · Answer

Thanks Joel, I love the idea of a right to continued marketing clause, especially because we have a property which I suspect may spark additional offers if it gets around that someone has made an offer. A drastically shorter due diligence period and also an additional earnest money deposit for using an extension period were included by our broker in our counter-offer, but I really like the right of continued marketing clause, even with a ROFR, and will have to keep that in mind depending on how negotiations proceed.Thank you so much.

Jeff Glinski · Answer

Ryland, Yes, I'm lucky enough to have the problem of developers looking to purchase the property I own. It is a property with some older office buildings in an older metropolitan area that is undergoing some pretty extensive re-development with new retail and new condos/housing. Since the buildings are older, and it is a fairly large piece of land, about 1.5 acres in a densely populated area, it may make financial sense to sell the land for redevelopment. We have been approached by a couple of developers, I'm just hoping to learn something about the negotiation process and how they think.

Ryland Taniguchi · Answer

Was not clear on your question. Are the developers looking to purchase or proposing a JV with you the seller?

Joel Owens · Answer

I used to work for developers back in 2006,2007 assembling land for commercial development.If yours is the only parcel then probably they will not have a confidentiality clause in there and non-disclosure. If buying your land is part of a bigger project than usually there is language you can't tell anyone other than your legal counsel.The developers doesn't want people getting wind of a project early on because these land investor squatters will try to buy properties up and then tie up the project asking crazy prices for the land.The developer already wants all the land controlled before they submit their site plans for zoning approval. If it's one back piece that is not as important than the developer can cut that part off and build around them if they want too much for the land.You need to make sure that the earnest money with some or all of it goes HARD meaning it is non-refundable for any reason. Doesn't matter if the developer gives 200,000 earnest money if there is an out then as a seller you get nothing. Developers will put in a ton of out clauses. Usually the seller only catches maybe 3 out of 10. For a friend who was trying to sell his land that had an old business on it I caught all of them which is why the developer wanted to bring me on for assembling the other land parcels.Even if some earnest money is non-refundable and it stipulates that in the contract make sure that either your attorney is holding the EM or a neutral title,escrow, or attorney is holding. Do not let the developers attorney hold. Even if you are legally due the EM they can deny and tie up in court and although you might eventually prevail you will waste a lot of time and money. I have seen parties use this before as a bargaining chip to get their attorneys fees paid before they agree to release the earnest money to the other party.This is why you want language that says contractually if that party is due the earnest money for a breach of contract then the holding escrow company can release the earnest money to the non-breaching party without the breaching parties consent or approval.No legal advice given.