Buying Commercial Property - The Process Explained

Early on in its operation Mackersy Property identified a number of people who wanted to participate in the commercial property market but weren’t keen to go it alone, be exposed to only one part of the market, or run negotiations with bankers. So, it started putting together groups of potential investors (syndicates) to acquire commercial properties. Investors who qualified contributed their funds (equity) while the bank provided mortgage lending (debt) for the shortfall.

In this way investors could spread risk by

1. taking a small part of many of Mackersy Property’s commercial property offerings
2. owning a part share in buildings located throughout New Zealand, and
3. having tenants from different market sectors.

In broad terms, this is still the way Mackersy Property operates.

Off-market deals allow Mackersy Property to deal directly with vendors, negotiate or re-negotiate key terms, seek the support of Mackersy Property’s Investment Committee, assess the likelihood of investor support, and refine the terms of the deal before the opportunity is published to the investor group. In this way, the investor group gets access to property that is not on offer to the general public.

Mackersy Property also makes offers for on-market properties, but usually in tightly controlled situations when it can indicate in advance its intention to buy, and the terms on which it will proceed: that is, it can canvass whether the vendor will accept an offer which suits Mackersy Property’s model, and ensure the project will have broad appeal to the investor group.

As its portfolio grew Mackersy Property established relationships with the commercial banking teams of NZ’s major lenders. It now enjoys support from all of them at different times for different syndication projects.

Early in the property buying (acquisition) process, Mackersy Property’s Treasury team liaises with key personnel from ANZ, BNZ, Westpac, ASB, or Kiwibank about financing the purchase of the property. It works to obtain the best possible commercial lending terms available and recommends which lender is best to fund a project. Part of that team’s analysis is to evaluate the types of lending facilities on offer, interest rates, margins, loan-to-value ratios and hedging strategies. This enables Mackersy Property to model the investment and provide initial and predicted returns for investors to evaluate.

Interest rate risk is one of the many risks associated with property ownership and should always be considered when making a purchase or joining a syndicate. However, well-managed debt has traditionally been the friend of commercial property investors, allowing leverage and increasing return.

After basic hurdles like these are crossed, Mackersy Property undertakes further due diligence by running a model it has developed. Mackersy Property’s model adds the purchase price and the costs of acquisition together to give the full purchase price. Costs to investigate the property’s merits (building, geotechnical, quantity surveying and valuation reports), bank and accountancy fees, legal due diligence costs, facilitation and management fees make up the end figure. That figure is split, with around one-half being ‘sold down’ to investors, and the balance being provided by bank funding. Bank funding or gearing has traditionally worked to maximise return, but the current interest rate environment is challenging that assumption.

The model shows the actual initial return on investment and also extrapolates potential returns on an investment over a three-year period. Anticipated funding costs are factored in, along with annual accountancy costs and those for Mackersy Property’s full investment management service. The assumptions made by the model are conservative. Growth in the leases (increased rent), interest rate risk, and the effect of the loan to value ratio are factored in. Cash flows may be run internally, or by Mackersy Property’s accountants, Moore Markhams Otago.

If the outcome of Mackersy Property’s preliminary investigations is positive, a contract is negotiated for the purchase. 

In commercial property negotiation vendors and purchasers are involved in a game that revolves around reaching a point at which both parties are satisfied with the outcome. The process may be rapid-fire, quickly completed and recorded, but if the expectations of the vendor and purchaser don’t match, it can be protracted, or even fail.

The respective interests of the parties dictate what’s up for negotiation and what’s not. The matters to be agreed on, price, deposit, and settlement date are often the simplest to establish.

Other commercial terms or pre-conditions usually favour the purchaser and may be more contentious because they rely upon the input and advice of third parties like valuers, quantity surveyors, bankers and lawyers. The advice their professional advisors give Mackersy Property may not necessarily favour the vendor, and re-negotiation may have to occur.

The legal due diligence process, the outcome of a valuation or finance application, and the content of Building or Geotechnical Reports may all alert Mackersy Property to matters not known or disclosed by the vendor which need to be resolved prior to any confirmation.

The terms of a contract or agreement are determined by the nature of the property being purchased. The sale/purchase of an existing building, with established leases and listed fixtures which will pass to the purchaser is the most straightforward.

If the purchase is of a property yet to be built, or being built, then the Agreement will have a different flavour and record key milestones and payment dates, and the terms of the lease to commence on completion.

If the project is a turnkey one, the terms will be different again, with final payment to the developer only being made once the project is complete.

What is common to most Agreements, will be due diligence conditions allowing Mackersy Property the time to investigate the project in depth. After due diligence is complete there will also be a further defined period during which investor support must be obtained.

Mackersy Property’s Facilities Managers and other independently qualified personnel will also visit the site in the due diligence period to check out the claims made for the property in person. For major acquisitions, it is common for many of the team to view the property and discuss the positives and negatives of the project, site or building.

An Investment Committee sits every week to ask these questions. It is made up of past and present owners of the business, team members, and Colliers Otago personnel who discuss current opportunities and debate their merits. Matters like the potential for upside, the property’s location, investor and market sentiment, the property’s back story, its ability to be re-leased, and any other relevant factors are all discussed.

The process of confirmation is likely to be in two stages. This is because an investment opportunity will only be offered to Mackersy Property’s database if the pre-conditions are met satisfactorily. Confirmation of an agreement only happens when sufficient investor support is obtained.

To enlist investor support, once a contract or agreement is signed, an Information Memorandum (IM) is put together summarising the opportunity. 

The IM contains information to allow investors to assess their commitment and participation: purchase price and parcel sizes, descriptions of the building and its services, analyses of the location, tenant, lease, and valuation, and the likely terms for the lending required. The direct costs of acquisition are factored into the purchase price, and include allowances for accountancy, bank, valuation and Mackersy Property’s facilitation and management fees.

In the pre-confirmation and pre-settlement periods, investors who have expressed interest are qualified and identified by the Compliance and Investment Teams. Once those steps are complete, investors pay in their equity, and their monies are applied to the purchase. When the property purchase settles, units or shares in the Limited Partnership are issued to the investors. Directors are then appointed from the investor group to take on the governance of the Partnership.

Both the vendor and purchaser sign documentation to effect the change of ownership, called the transfer, along with Land Transfer Tax Statements. A purchaser will typically sign bank loan documentation, while a vendor will sign mortgage discharge documents. Their lawyers exchange undertakings promising to carry out the tasks necessary to effect the ownership change, such as signing ‘dealings’ prior to settlement and, once monies are paid, registering the change in the Land Titles Office. Vendor undertakings may include making the documents associated with the property (like original lease documents) available to the purchaser.

Delays in negotiating or confirming an Agreement can be related to communication failures of one kind or another, to the need to raise and resolve issues arising from the due diligence process, or to a sluggish response from the database. Although the Agreement will provide strict time frames for confirmation, it is commonplace for negotiations of time for confirmation to be sought and granted by the vendor.