Case Study: Buy Commercial Property - purchasing the Cosmetic Company NZ's leased premises
Property acquisition strategy and purchase negotiation
Need to buy commercial property?
The Cosmetic Company NZ Ltd creates and produces quality skincare, personal care, home and toiletry products for a wide range of clients in New Zealand and overseas.
The Cosmetic Company runs its manufacturing operations from a leased commercial property in Penrose, Auckland.
The Cosmetic Company wanted to buy commercial property, and preferably buy its leased premises, to ensure manufacturing certainty; their predecessors operated from the premises for over a decade.
The Cosmetic Company had secured a right of last refusal to buy its leased premises in a newly negotiated lease. The purpose of the clause was to protect manufacturing continuity.
Following the negotiation of the new lease, the landlord put the property on the market for sale by tender. The landlord’s objective was to maximise the tender price at which it had to offer the property to The Cosmetic Company.
The challenge for the company was to buy the property via its right of last refusal at a fair market price taking into account its extensive knowledge of the building and its insights that the contract rent was above the market rate. They wanted to avoid paying a premium to buy the property under the sale by tender.
Proactive Property Group was engaged to undertake initial due diligence on the property, research recent and comparable sales to determine a market value range and advise on a tender strategy and price.
The first step was developing a purchase strategy to manage the vendor’s price expectations (via the appointed real estate agents) and to influence other tender bids. As part of that strategy, we sought to raise issues and release information about the building condition and the premium contract rental.
We engaged with the real estate agents to source the tender information memorandum, inspect the property and gauge the range the agents were pricing the commercial property.
Initial feedback from the agents was that their pricing expectation for the commercial property was in 5% to 6% yield range (of the contract rental).
The next step was to undertake due diligence.
What is due diligence?
When buying commercial property, due diligence typically involves identifying issues that may impact the property’s:
- lease and rental potential (current and future);
- use, constraints, and future development potential;
- neighbourhood and access issues; and
- current and future value
The objective of due diligence is to identify and factor in the property risks into your purchase price; this minimises the operational and financial risks downstream.
Our due diligence results
- We obtained sales data of comparable commercial properties in Penrose and established a market value range;
- We identified issues with parking easements and accessibility;
- We identified outstanding code compliance issues;
- We identified that the tenant owned a substantial part of the building fit-out and fixtures which would influence future rental reviews; and
- Building condition and weatherproof issues were identified and subsequently validated. The costs were built into a third-party building surveyor report.
The next step was to condition the agents on their price expectations.
We engaged with the agents over two weeks following the due diligence exercise, asking questions and raising legal and building issues for the agents to refer back to the vendor for a response.
In addition to raising issues around the commercial property, we also questioned the contract rental.
We highlighted that a market rent was likely to be lower and tabled an indicative rental estimate for comment and discussion.
We also raised the issue of the tenant ownership of the fit-out and fixtures and its impact on the contract rental rates for warehousing, production, manufacturing and office areas.
Towards the end of the tender campaign, the agents revised their pricing expectations to around a 6% yield of the contract rental.
We advised the client to submit a tender offer from the shareholder’s property-owning company; this move prevented triggering the right of refusal, meaning they could hold it in reserve.
We recommended that the shareholder’s property-owning company submit a low unconditional tender offer supported by the building surveyor’s premises condition report and costed dilapidations schedule. This recommendation was based on the expectation that:
- The vendor wanted certainty out of the transaction; and
- The other 2-3 tender offers would be at a higher price but conditional to enable further due diligence to mitigate purchase risks.
By attaching the building surveyor’s report to the tender offer, this made the information public to the agents and raised deferred maintenance and warranty issues with the vendor.
Following the close of the tender, there was a brief post-tender negotiation where the client’s tender offer was increased by 6% before the client’s tender offer was accepted.
The Client Outcome:
The client successfully secured the commercial property without paying a premium due to the sale by tender campaign.
The client purchased the commercial property at a yield of 6.7% of the contract rental; this was equivalent to a price only $165,000 higher than an independent market value valuation undertaken on the commercial property in November 2019.
It was important for us to purchase our leased commercial property at a value that reflected the issues with the building and the inflated contract rent. We did not want to pay a premium to purchase our leased commercial property.
We have used Proactive Property Group and Marcus on other transactions, so we trusted that he could help us purchase the premises.
Marcus’ due diligence was comprehensive and raised issues about the leased commercial property that even we, as tenants, were unaware of.
Marcus’ ability to engage with the agents, talk down the initial price expectation yields and devise a tender strategy to purchase the leased commercial property on the best possible commercial terms saved us paying a premium of up to $1m.
If you need to lease or purchase commercial property, I recommend Marcus without reservation.
The Cosmetic Company NZ Ltd / Franchise Property Limited
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