commercial real estate · Retail leases · Uncategorized

The first issue to review when starting due diligence on an acquisition

In the 30+ years that we have been doing abstracts and cash flow analysis as part of property and portfolio acquisitions, there is one issue that we do a quick check for before we start the acquisition process in full force:

Rights of first refusal to purchase a property

Why that issue? A right of first refusal to purchase a property essentially gives a tenant the absolute right to purchase a property on the same terms and conditions that a prospective buyer has agreed to purchase the property. So, you sign that letter of intent to put a property under contract, and you are on the clock. Your due diligence period has begun. Though you may get your deposit back if you elect not to proceed with the purchase at the end of the due diligence period, you might be spending tens or sometimes hundreds of thousands of dollars in due diligence fees (physical, environmental, financial, demographics, site visits, etc.) that you will be out of pocket and will have to (let’s use a very technical term here) eat if you don’t move forward.

But, with a right of first refusal, you can spend that money and be ready to move forward with the acquisition, and a tenant can exercise its right to acquire the property. Guess what? Unless you have addressed it up front with the seller, you may still be out those fees. You don’t want to have the rug pulled out from under you.

So, when we get a new acquisition, we immediately go on the hunt for rights of first refusal. While you can find them in any lease, the likeliest culprits to have these rights are supermarkets and any sort of ground lease tenants.

More often than not, in retail, it is only the supermarket type tenant that will have a true right of first refusal. A ground lease or outparcel that has one will often include certain conditions to protect the landlord. Specifically, in that case, we are looking for a condition that states the right does not apply if it is being sold as part of a larger property sale. So, a fast food outparcel may have a right of first refusal, but only if the seller is marketing that parcel on its own – not as part of the entire center of which that outparcel is a part.

But, the bottom line is that taking the time to do a quick search for these rights early in the process can save tremendous headaches and dollars than if they are found later.

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