Real Estate Levers in Transaction Negotiations
May 31, 2022
by a searcher from University of Virginia-Darden - Darden School of Business in Charlottesville, VA, USA
I am currently negotiating an LOI for a manufacturing company that uses a facility on 1.5 acres of a 3 acre lot (1.5 acres is an empty plot). The business owner owns 100% of the company and the 3 acres (real estate is held in a separate entity). He is intent on a specific valuation for the business that is higher than I am willing to pay and he is leaning toward holding onto the real estate. I intend to request a locked in lower rent for a 5-year period to boost the near-term cash flow in an effort to get the owner the valuation he is looking for (or closer to it). Does anyone have any other thoughts on other levers available in this negotiation related to the real estate? Maybe an option to buy the RE at a certain price after five years or something related to the future development of the empty 1.5 acre plot? Anything I should be careful agreeing to in this situation? Additional context: the owner is 86 years old and wants as much cash upfront as possible. Not sure why he is learning toward holding onto the real estate and not just offering to sell it to me....
from University of Southern California in Los Angeles, CA, USA
My suggestion, talk to a few industrial brokers to get a longer term perspective of where cap rates are for your kind of manufacturing facility. Say today they are 5% cap rates and you assume they may expand 100-150bps to 6-6.5% over the next 5 years. You can pay a higher NNN rent and then have a ROFR that the price is determined by the current (or be creative and say its T12) NOI of the real estate at a 7.0% cap rate, which builds in cushion over assuming cap rates expand. You can then be more comfortable if you do a ROFR, you could do a sale leaseback by selling at a 6% cap but you acquire at a 7%, so there's a spread.
You can also negotiate some free rent or you as tenant has access to use the extra land free of charge (i.e. for storage)
from The University of Chicago in Chicago, IL, USA
2. Have not had luck with swapping business value with lower rent. (I wonder if opposite will work, though have not throught ot completely.)
3. Depending on the business, there may be opportunity in WC, invemtory, even EBITDA.
4. Multiples have a HUGE range. I put 80% weight on QoB. Low multiple does not protect you against weak QoB. A little extra on price just lowers the ROI. One can stretch price as long as you can finance it, service debt, get ROI and pass sensitivity test. Run pro-forma financials and check out if you an inch up on value.