Case Study: How to buy commercial property well

Cosmetic Company NZ: Commercial Property Purchase Negotiation & Acquisition

Case Study No: 3

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The Cosmetic Company NZ Ltd, a leading producer of skincare and personal care products, faced a crucial decision to secure their manufacturing operations in Penrose, Auckland.

The Cosmetic Company runs its manufacturing operations from a leased commercial property in Penrose, Auckland.

This case study delves into their journey to buy commercial property which they leased and operated from, to ensure business continuity and strategic growth.

The Challenge: Ensuring Manufacturing Continuity

With a change in company ownership, The Cosmetic Company wanted to buy commercial property, and preferably buy its leased premises, to ensure manufacturing certainty.

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 Cosmetic Company was to buy commercial 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.

Navigating the Purchase

To address the challenge, The Cosmetic Company engaged Proactive Property Group to:

  1. undertake initial due diligence on the property
  2. research recent and comparable sales to determine a market value range
  3. advise on a tender strategy and price
  4. Negotiate the tender with the landlord’s agents.

The initial step involved developing a purchase strategy to influence the vendor’s price expectations and guide their own tender bid.

Due diligence followed, uncovering various aspects affecting the property’s value and potential, including lease terms, accessibility, compliance, and building condition.

Price Conditioning and Negotiations

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).

By engaging the real estate agents and raising pertinent issues, Proactive Property Group aimed to condition the agents’ price expectations and create transparency. They questioned the contract rental’s validity and highlighted potential discrepancies, leading to revised pricing expectations from the agents.

Towards the end of the tender campaign, the agents revised their pricing expectations to around a 6% yield of the contract rental.

Tender Offer

Proactive Property Group 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:

  1. The vendor wanted certainty out of the transaction; and
  2. 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.

A well-informed tender offer was submitted, supported by a building surveyor’s report, ensuring the company’s bid stood out.

Post-Tender Success

Post-tender negotiations resulted in an increased tender offer from The Cosmetic Company, which was eventually accepted. The company secured the commercial property without paying a premium, purchasing it at a yield of 6.7% of the contract rental.

The Client Outcome

By engaging experts and skillfully navigating the purchase process, the Cosmetic Company  achieved its goal of securing their manufacturing base while making a financially prudent decision.

The Cosmetic Company 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.

Client Testimonial

“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.”

David Smith
The Cosmetic Company NZ Ltd / Franchise Property Ltd

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