Closing “the Gap”

By Craig Tomlinson, Director, Stan Johnson Company: In a commercial property offering, there is invariably a difference between what a buyer wants to pay and what a seller wants to receive. That difference is known as the gap or the spread.

By Craig Tomlinson, Director, Stan Johnson Company

In a commercial property offering, there is invariably a difference between what a buyer wants to pay and what a seller wants to receive. That difference is known as the gap or the spread. The size of the gap often changes during a transaction. The negotiation process can be frustrating with both sides feeling the other is out of touch with the market or even behaving badly.

The greatest gaps typically occur when economic and geopolitical factors cause values to fluctuate. That’s when buyers and sellers try to time the market—and almost always miss. Those factors overlay a corporate real estate market, which since early 2008 has experienced a continuing decline in the supply of stable, prime property.

Many pundits claim debt is back and capital is flowing. However, overall commercial real estate sales volumes are only at 55 to 60 percent of 2007 levels and appear to have settled there. The real estate still exists, but most of it is held by second- and third-generation owners who can’t imagine what else to do with their money. These are not serious sellers; quickly making that determination can be a buyer’s best work.

Efficient markets occur when the seller’s representative exposes an asset to a broad range of knowledgeable and capable potential buyers, provides complete and accurate diligence material and has a clearly defined process in place. If any of those three components is missing, the chance of reaching fair market value may be compromised.

The most common reason for a buyer-seller gap is that the seller’s expectations are too high, usually because he has inaccurate or incomplete market data. The next most common reason for the gap is that a seller’s expectations are reasonable to the market, but offers come in considerably lower. This typically occurs when the property isn’t well packaged or when incomplete or inaccurate diligence information hasn’t been provided. Buyers are less likely to value information about a property when they do not clearly understand it.

The most difficult gap to close is the one that occurs when buyer and seller have unrealistic expectations—usually due to incomplete information, compounded by both parties’ evaluation errors that distort understanding of a property’s full market potential. Sellers often ignore replacement reserves and economic vacancy information to make rosy assumptions about the timing and true costs of stabilizing their rent rolls.

To achieve best price, sellers must have an attractive, coherent and informative offering package that not only clearly explains the benefits of the asset, but also addresses issues that would concern most buyers. The property should be exposed to the greatest possible number of qualified buyers with a competent broker. Sellers are best-served by a broker with modern sales tools and with a clear buyer profile for that property—a broker who can tell the difference between serious buyers and tire-kickers. A successful seller is realistic and forthcoming, and considers all the benefits of completing a transaction.

Successful buyers are usually represented by successful brokers. Those agents get to know their clients well enough to help them look beyond the numbers on deals that may appear marginal, but are a strategic fit for their portfolios or accomplish an immediate goal. Those brokers also know how their clients buy and are often better than their clients are at spotting opportunities with inherent advantages.

Ultimately, both parties must be willing to understand the other’s issues and determine whether a win-win solution can be achieved—and then cooperate to achieve it.