Concessions. What Happened to Deal Integrity?
By Mark Hulsey
No doubt, there will be many readers of this article who will adamantly disagree with what I’m about to discuss and my position on “concessions” in real estate transactions today. Maybe I’m missing something here and just don’t get it. But, let’s talk a little bit about where concessions are a legitimate transaction term for us to work with, versus how many in the real estate business today believe it’s a normal and acceptable part of the transaction process.
We recently represented an investment buyer on a $2M+ prime retail asset in the Twin Cities urban metro. First off, in the current market conditions, getting this type of property quickly under contract is a genuine challenge; there are many investment buyers vying for a crack at an income-producing asset in a Class A urban location. When we worked with the listing broker, I assured him we would have a “clean” deal, but with standard due diligence. And we did. Until the last day of the due diligence contingency period, when the Buyer advised me, he was seeking a price concession from the Seller if we were going to close next week, because ‘the capital improvement costs were so much more than expected.’ That clean deal just got dirty quickly.
Naturally, I followed the buyer’s instructions for a price concession request despite my best efforts to warn the Buyer about the potential consequences for this last-minute amendment. Sure enough, it quickly killed the deal. And whoever said there isn’t any emotion in commercial real estate has never dealt with a seller watching a buyer try to take money out of their pocket at the last minute. I can assure you there’s often plenty of emotion for buyers and sellers of commercial real estate.
Interestingly, this commercial investment buyer did not think there was anything wrong or unusual with the price concession request at the closing bell of the due diligence period. In fact, this buyer mentioned something about being told by someone that it’s just what everyone does on residential deals. There’s the key word – residential. And yes, clearly this story shows it can happen on the commercial side and sadly it does far too often.
As a commercial brokerage group focused on serving sellers, we know first-hand how this concession game can play-out and in fact, is often factored-in at the point of the sales contract. Specifically, what that means is the broker and/or buyer will be happy to provide a full-price offer right now to tie up the asset, knowing full-well they will seek a seller concession request at the conclusion of their due diligence contingency period. There’s nothing good about this. As listing brokers, we are looking for this common tactic everyday and have a keen sense of when someone wants to play this game.
So, here’s the deal. Seller concession requests near the end of the due diligence contingency period is out of control in many sectors of real estate sales. Absolutely, out of control. For some crazy reason, in our Twin Cities market, it has become customary and expected in many residential sales that the Buyer will ask the Seller for some sort of concession or combination of concessions, such as completing a long list repairs and dropping by the price by $10,000 due to other repairs needed. In commercial deals, seller concession requests can reach into the hundreds of thousands of dollars.
I believe the mentality has become that of, “because we can, we should.” That doesn’t work. That kills all deal integrity. And often, the integrity of those associated with the 11th hour seller concession request to reduce the final sales price post-inspection. Yes, you heard that right…deal integrity. Just because you may be able to hold the seller hostage and squeeze them for a few more thousand dollars at the end of the contingency period, then why wouldn’t you? It’s just lousy.
Deal Integrity. Old school, deal-making held a good amount of good-faith negotiations, followed-up with expeditious due diligence, and finally closing and funding. Pretty straight-forward. In today’s market, listing brokers and sellers need to know that many agents & brokers in the market love to play the seller-concession game. As primarily a seller’s broker for commercial & investment properties, I believe there is a simple remedy to this out-of-control concession negotiation malady. Just say no. Request a Cancellation of Purchase Sale Agreement immediately the moment the word “concession” is mentioned. Send the message loud & clear, as long as the concession is not truly warranted, they’re done. No games here.
Seriously, what seller brokers needs to do, along with their seller, is say no to the buyer’s concession request. If the market is strong, the sales price appraises and matches the market, the due diligence has not uncovered any significant or catastrophic issues that warrant a cancellation, then most concession requests should be rejected. It’s time to turn this around.
Please know that there is a time and place for concession requests in both commercial sales and leasing transactions. If due diligence investigations uncover serious issues not known at the time of executing the sales contract, and that discovery of information has serious transaction implications, then a seller concession discussion may be warranted. For example, in many commercial deals, once we get into the thick of it with environmental studies and the Minnesota Pollution Control Agency, unforeseen situations are often uncovered and merit the seller’s involvement.
This is NOT what I’m talking about here. I’m talking about unjustified, unwarranted seller-concession requests when the deal has played itself out for weeks or months. It’s not uncommon in commercial leasing for a Landlord or Owner to grant the Tenant a rent concession for a period of time. However, it’s often done in exchange for something from the Landlord such as a Tenant Improvement (TI) Allowance; rather than providing the Tenant an improvement allowance (i.e. $20.00 psf) for the build-out of their space, some Landlords will provide a rent concession commensurate to the TI allowance instead. That’s fine if it works for both parties. This is a good use of a concession as a transaction term that benefits both parties.
So, enough is enough. Let’s all see what we can do to keep our deal integrity intact. This is the best approach in the long run. Of course, our professional reputations are directly tied to ‘how we broker.’ It’s incumbent upon those of us seasoned real estate pros, to lead the way – to do the right thing.