Bass, Berry & Sims attorney Gil Uhlhorn authored an article published by Multi-Housing News discussing seller concessions in commercial real estate deals as the current market has begun to shift more favorably to buyers.
As Gil points out, the commercial real estate market has been extremely competitive for buyers in recent years due to limited supply, low interest rates and an abundance of cash, which has allowed sellers to demand concessions that require purchasers to step outside of their standard acquisition process comfort zone. However, the market has seen a shift in recent months due to a rising interest rate environment, inflation concerns and continued supply chain issues.
“Sellers are recognizing that they can no longer expect certain seller concessions related to due diligence/closing timelines or hard earnest money and are finding that purchasers are no longer willing to accept certain financing risks that have been commonplace in the market,” Gil said. “However, sellers still value certainty of close, and an aggressive purchaser may still make its offers more attractive by proposing a ‘nonrefundable’ deposit at the time of contract execution or offering a short diligence period with a quick close.”
As Gil previously discussed with GlobeSt.com (available here), nonrefundable deposits are a risky approach, and buyers must understand and accept that risk while also taking certain steps to mitigate the potential loss. These include taking a “free look” inspection period to ensure they are comfortable with the property (and recoup earnest money if not). Additionally, sellers are often willing to accept certain carve-outs wherein the deposit becomes refundable, including (1) seller default, (2) casualty, (3) condemnation, (4) title/survey/zoning matters and (5) environmental condition.
The full article, “How CRE Deal-Making Dynamics are Shifting,” was published by Multi-Housing News on July 13 and is available online.