When purchasing a commercial real estate (CRE) property, it is important to negotiate favorable financing terms early on in the transaction. This includes the loan duration (commercial mortgages are typically 5-10 years), as well as the loan-to-value ratio (CRE loans are usually 80-90 percent), and closing conditions, which gives the owner/user an opportunity to keep their deposit after the due diligence period is over. 

Your lender will require third party reports to ensure the property is financeable. Minimally, these include an appraisal, an ALTA survey, a building inspection and a Phase I Environmental Site Assessment. These reports are crucial when evaluating the health of the property and potentially renegotiating the deal if problems are found during your due diligence period. 

In the early stages of negotiation, it is advisable to consider the following: 

1. Set a budget: Speak with a commercial lender, outline your needs and set a budget based on your business and financial goals. 
2. Enlist a trusted advisor: Select a credible Commercial Real Estate (CRE) expert to assist with the purchase process throughout the acquisition. 
3. Determine a fair market offer: Ask your CRE expert to pull comparables for like-kind building sales in the area to support your fair market building offer 
4. Conduct site investigation: Carry out a thorough examination of the site. 
5. Adopt the 1% rule: If you are buying an investment property, this general rule specifies that the monthly rent should be, at a minimum, one percent of the purchase price. 

When buying a commercial property, there are times when the buyer can re-negotiate or re-trade the terms of the transaction.  Whether you are purchasing an investment property or an owner/user property, below are some specific situations where the buyer can potentially renegotiate the terms of the deal after the initial agreement has been signed. 

• Due diligence issues: During the due diligence process, the buyer may discover issues that were not previously disclosed, such as environmental or structural issues. If these issues were not factored into the initial agreement, the buyer has the potential to renegotiate the terms of the deal or even terminate the agreement.
• Appraisal issues: If the buyer encounters difficulties obtaining financing due to an appraised value that is lower than the agreed-upon purchase price, the buyer may be able to renegotiate the terms of the deal to make it more favorable for themselves. A shift in the market, such as a drastic and sudden downturn in the economy, may provide an opportunity to renegotiate terms. This happens in CRE when we experience an increase in vacancy rates quite suddenly or a decrease in rental rates. The deal is open for renegotiation to reflect these changes. 
• Contract contingencies: Almost all contracts in CRE have contingencies, especially when it comes to the inspection of the property, this would allow for renegotiation if certain conditions were not met such as obsolete HVAC units or a leaky roof.

Honest and open communication between both parties is crucial when seeking to renegotiate. It’s crucial to thoroughly explain the reasons and include third-party written proof behind the request for re-trading or proposing alternative solutions. It is also important to note that the ability to renegotiate the terms of a CRE transaction depends on the language of the initial agreement and the specific circumstances surrounding the renegotiation. 

At Davis Commercial AZ, we believe that it is best practice to consult with an attorney and seek the help of a CRE professional to determine all options and negotiate the best possible outcome. With more than 25 years of industry experience, our team is well-versed in guiding clients through the initial and renegotiation processes. To learn more about our services and team, please get in touch here.