When getting to the ‘finish line’ can be a challenge

All sorts of issues can creep up to potentially stop a deal from moving forward

I was involved in several commercial real estate lease and sale transactions in 2012, but it felt like almost all of them had issues that made it difficult to get to a signed lease or sale closing, and stretched out the process far longer than it should have taken. I thought I would share some of those in as generic a fashion as I can so as not to disclose the specific transactions.

 • Signing authority: A property was owned by a New Hampshire limited liability company whose membership interests were transferred to an out-of-state LLC. The lawyer for the buyer was insistent on reviewing all of the LLC documents to confirm that the person who would be signing on behalf of the New Hampshire LLC had authority to do so, and that the transfer of the interests had been done correctly.

The transfer of the LLC interests had taken place apparently in lieu of a foreclosure, and the concerns of the lawyer were understandable. Despite a lack of all of the documents that could have resolved the issue, the lawyer’s concerns were satisfied and the closing took place.

 • Last-minute space takeaway: I was working with a business that liked a space, and we were close to a deal on the terms of the lease. The broker for the landlord went “radio silent” on us. We moved on to another building and were able to reach agreement on a deal. We found out in the interim that another tenant in the first building really wanted the space my client was looking at for expansion purposes, and the landlord felt that loyalty to a large existing client wanting to expand was more important than landing a new smaller tenant.

 • Change of owner: I was helping a tenant negotiate a lease deal in a multi-tenant property and got word “on the street” that the landlord was working on an agreement to sell the property to a third-party investor. We had progressed quite a bit on the terms of the deal, but the planned sale brought discussions to a halt. The current owner felt he couldn’t continue the negotiations, given the existence of the sale agreement, but he didn’t want to allow the buyer to enter the negotiations until the buyer completed his due diligence, leaving my tenant client in the lurch.

Fortunately the tenant had a flexible arrangement at its current location and was able to patiently wait out the sale of the property. The buyer picked up the negotiations where the seller had left them and the deal was finalized.

 • Tenant fitup: Issues sometimes arise on the buildout of tenant space. In most cases, the landlord takes care of renovating the space for the new tenant, but sometimes the tenant wants to take care of it. Generally, it’s a matter of control and concerns over quality of the work. The landlord wants the entire building to be consistent as far as “fit and finish,” but the tenant feels it can get a better deal by contracting with its own builder.

I was working with a tenant on a space in a high-rise building, and the landlord offered an allowance for fitup that was far less than the overall cost for this tenant’s specific needs. The tenant sent a few contractors of its own choice to the building and eventually got a quote from one of them that it was happy with. The back-and-forth over who would do the fitup really slowed down the entire process.

 • Corporate guarantees: Landlords generally require either personal or corporate guarantees when an entity is the tenant, as well as security deposits. I had one case this year in which a U.S. subsidiary of a foreign corporation was the tenant, and the foreign corporation wanted the subsidiary to stand on its own with no guarantee.

The subsidiary was a new entity, with no sizeable assets or credit history. It was essentially a startup. The solution in this case was for the subsidiary to provide a letter of credit satisfactory to the landlord.

 • Environmental issues: I had two deals this year I in which there were environmental issues. In one there were “popcorn” ceilings (containing asbestos) in some apartment units that were built in the late 1960s or early 1970s, and in the other there was some limited history of waste possibly generated by a dry cleaning business about 15 years ago.

In the case of the ceilings, the buyer initially walked, but later came back and made a business decision to proceed to the closing, since the ceilings were not crumbling and did not constitute an active environmental issue. The buyer plans to address the situation over time.

The buyer in the deal involving the dry cleaning waste conducted some limited testing that proved negative, and moved forward to the closing. All indications were that the problem was very limited in scope, and water testing since that time showed no issues. The seller was reluctant to allow testing because it may have opened a Pandora’s box, but the buyer wanted to take whatever reasonable steps it required to avoid exposing itself to liability.

I have not been involved in any deals over the past couple of years that were derailed due to financing issues, but I continue to be amazed at the type of issues that can creep up to potentially stop a deal from moving forward.

Dan Scanlon, an adviser with Grubb & Ellis|Northern New England, Manchester, focuses on business tenant representation and investment sales. He can be reached at 603-206-9605 or djs@grubbellisnne.com.