Portfolio sales occupy their own unique category of commercial real estate transactions. The challenges, complexities and procedural nuances that make portfolio sales so distinctive also limit the number of parties that can make such purchases.
In a standard commercial real estate transaction, familiar steps in a fairly standard process give prospective buyers plenty of time and opportunity to conduct their due diligence. From a buyer’s standpoint, there is little to no risk until your due diligence process is complete. You aren’t spending any money until you have the project under contract and, as long as you have the deal in hand, no one else can move on it.
Mark Krysinski
From the initial letter of intent through to the purchase agreement, and even up to the eventual closing, buyers can pull out of the deal for any number of reasons. Consequently, the overall obligation and financial exposure for prospective buyers is fairly minimal.
Portfolio sales completely reverse the risk equation/analysis. The portfolio is marketed privately and the sale is conducted almost like a managed auction. Prospective buyers will typically submit letters of intent. Once the seller thinks they have a winner on the economics of the deal, they will move forward.
Unlike a standard transaction, however, aspiring buyers are expected to conduct their due diligence during the period of time before any contract is in place. In other words, possible buyers are spending a potentially significant amount of their own money on due diligence before they are under contract, and before there is any certainty that they will end up with the portfolio of properties at the end of the day.
Once a winning buyer has been chosen, the seller will typically push quickly for a purchase agreement in conjunction with a hard deposit, and then a similarly short timeline until closing (anywhere from 10 to 40 days is common).
Sellers are looking for certainty of close. They want the prospect of backing out of the deal to be too painful to contemplate.
Challenges and choices
The upside of portfolio sales is that they present the opportunity for motivated buyers to acquire large and desirable packages of properties in a relatively short amount of time. But because much of the risk, the due diligence obligations and the front-loaded expense falls onto prospective buyers, the challenges are commensurate with the potential rewards.
Paying more up front with the outcome still uncertain is one obvious challenge, but there are other, less obvious issues that must be handled as well. For example, it may seem helpful to have a cache of due diligence materials presented up front in one website, but the reality is very different. The materials on the website are often changing, with documents being added and updated frequently. As a result, buyers have to expend a lot of resources to manage the due diligence process and monitor the site on a regular basis for any significant changes that could impact the process or the purchase. And, because any representations or warranties will be tied to the disclosures on the website, buyers need to take a “snapshot” of the site at the right time and preserve that information.
True guarantees are tougher to get with portfolio projects, and there is a prevailing sentiment that buyers are acquiring the assets “as is.” Due diligence conducted by prospective buyers tends to be fairly limited and tends to provide confirmation or updates rather than groundbreaking new information.
It is also inherently and understandably harder to cherry pick specific properties. Along those same lines, you cannot throw away an entire deal because of an issue with one piece of real estate. To some extent, buyers may be obligated to take the good with the bad.
The bottom line is that the mechanisms that allow prospective buyers to mitigate or eliminate some risk in a single-property purchase either do not exist or are turned 180 degrees in a portfolio sale.
Counsel and consideration
Because of the unavoidable nature of that risk, and the complexity of managing large amounts of detailed information in a relatively short amount of time, buyers in these scenarios typically are not new to the marketplace or the industry. The typical portfolio sale participant is a sophisticated buyer with strong capital resources and due diligence teams capable of analyzing and taking on large and complex risk.
For anyone pursuing a portfolio, however, it is critically important that they partner with a trusted legal resource that can conduct due diligence on their behalf, guide them through the bidding and purchasing process, and provide invaluable perspective. When seeking the right partner to assist with this process, here’s what you should look for:
Volume – Your legal partner for a portfolio sale needs to be able to handle large amounts of (constantly changing) data, organize that data and communicate key information to you in a timely manner. Resources/personnel are also a factor to consider. Larger, more organized firms tend to be more capable when it comes to these transactions. A single portfolio sale might require as many as 30 to 50 lawyers to handle the volume of work.
Resources – Prioritize law firms with established depth and diversity in their practice areas. Portfolio sales are large and complex transactions with a number of moving parts. Your legal partners needs to be able to handle everything from tax issues (which vary from state to state and country to country) to closing costs, regulatory issues, zoning and more.
Experience and expertise – Experience with different property types is another asset. The issues surrounding multifamily, commercial buildings with multiple leases and industrial buildings are all very different. Demonstrated expertise with different types of assets is a plus. Along the same lines, because due diligence issues can be exponentially more complex, relevant experience and expertise is critically important.
Mark P. Krysinski is a partner in the Southfield office of Michigan-based Jaffe Raitt Heuer & Weiss. He is a member of the firm’s Real Estate Practice Group, specializing in commercial development, sales, purchases and leasing of real estate; financing and leasing of office, industrial, apartment and retail projects nationwide; complex mixed-use condominium developments, manufactured housing communities and multifamily housing communities.