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Negotiating a commercial real estate deal is more art than science, more strategic planning than pure numbers, and more understanding of the market dynamics. Shrewd investors must not only find an optimal commercial property for acquisition, but they also must create a deal structure that supports their investment thesis, financial goals, and market considerations. Whether you’re investing in multifamily, office, industrial or retail, each transaction comes with specific challenges and opportunities. Remember, no deal is perfect, so it’s your job as an investor to understand each and every issue. Know your upside and downside cases, understand capital expenditures, have alternative strategies to generate revenue, and be willing to accept certain deal terms even if they are less an ideal. Negotiating commercial real estate relies on sound financial and business acumen, but it also requires a psychological understanding of the seller’s goals. Therefore, empathy and communication are essential components to not only negotiating a good deal for both parties, but also to maintaining productive relationships that last throughout your career.
Understand your market, including market trends, past performance, comparable transactions, cap rates, vacancy rates, new and planned developments, and school scores and crimes rates. The more granular, the better. Know your local neighborhood as well as the general metropolitan or suburban area.
Build detailed financial models that focus on cash flow—both scrubbed past cash flow and projections—based on your assumptions about renovations, rent rates, and expenses. Assess financing structures based on target capital structure. Importantly, for an effective negotiation, bake in various scenario analyses to develop a range of possibilities to inform your ultimate purchase price. When you understand both the market conditions and property performance, as well as potential deal structures, you make an informed decision about how to approach a commercial real estate negotiation to maximize your investment returns.
Market and financial analyses can only provide insights, but they won’t guarantee a profitable deal. Determine your negotiation objections, price range, deal term parameters, and what you are willing to give up in exchange. Figure out your walk away price, whether you have any non negotiable terms, and where can you can be flexible. If you identify these various areas upfront, you can establish clear direction for where you want to take the negotiation with pre-defined parameters.
Begin the process with a written letter of intent. While you may not have all financial information and legal documents, you can likely set an indicative price, subject to due diligence. A letter of intent demonstrates your clear interest and intention to purchase the target property, making you a more serious buyer from the seller’s perspective.
If you move forward with due diligence and a broader negotiation with the seller, you can rely on your financial model and market analysis to help guide the conversation. Use your data and analysis as tools to support your negotiation. This strategy not only strengthens your position, but it also presents you as a credible and knowledge buyer.
Not every deal has to be bank financed with a large equity check. Be creative when possible to meet the seller’s needs and your capital constraints. Consider seller financing, non-bank lenders, payments over time, or a 1031 exchange, as some examples. It may take time and effort to unlock a deal structure that works for both parties, but flexibility helps create common ground.
Commercial real estate deals are not only about price. Think of all the deal terms that also must be negotiated that can, in some cases, be as important to you as a buyer. For example, consider escrow periods, due diligence periods, closing dates, and sale-leasebacks as some examples. Depending on the specific deal, these deal terms may be non-negotiable or you may be open to being flexible as part of the negotiation.
Not every deal term is a make or break. Know in advance which deal terms are most important to you. In any negotiation, you must be willing to make strategic concessions. You won’t win every point, and you may lose the majority of your deal term asks. However, focus on the overall goal to acquire the property with as much limited downside as possible. However, don’t let your obsession on winning every point kill the deal when you would be better off conceding on non-essential deal terms.
Commercial real estate negotiations can be stressful, but you must remember the big picture. Prepare through market analysis, financial analysis, robust due diligence, flexibility, strategy, and understanding the seller’s needs. Make concessions and be willing to explore alternative financing structures. Remember that this deal is likely not your last. So, your reputation matters. Keep your word and maintain your integrity, as you’re likely to find yourself across the negotiation table from this seller on a future deal.
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