BROKERAGE:Trailing the elusive real estate closing

Every deal is different in the eyes of brokers, but success comes from understanding clients and asking the right questions.

The pace of the real estate market is picking up substantially across the country, and it is already traveling at light speed in markets like Atlanta and Dallas, which remain two of the most active in the country in terms of sales, leasing and the development of new product. But who is conducting these transactions? And how do the processes that bring them about work?

The following two case studies: one a major industrial sales transaction in the Atlanta market, the other a major office lease transaction in Dallas, may shed some light on the interworkings of "the deal" -- outlining the sequence of steps, the thought processes and the strategies involved in the brokerage proceedings. A more thorough knowledge of the expectations of both sides involved in these transactions may help quicken the pace of future deals.

In addition, the outcomes in these two transactions may surprise many because they upset some of the precepts of real estate. But the lesson may be that the conventional approach may not be the best plan of action for every deal.

Sum of parts may exceed the whole In Atlanta, locally based NORO Realty Advisors was interested in selling three industrial parks, two in Gwinnett County, northeast of the city, and one in Cobb County to the northwest.

"NORO's management felt that, currently, Atlanta is a good seller's market. And based on the values the properties were expected to bring and the company's own portfolio mix, they felt it was a good time to sell," says Chris Riley, vice president with Atlanta-based Carterencor International.

Other than their location in the Atlanta area, the three properties had little in common. Of the two Gwinnett properties, the first was an eight-building mix of industrial, office and services. Physically it was older, unglamorous, with small tenants and a very management intensive upkeep requirement. The second was comprised of three buildings and, while also unglamorous, it included light industrial-business distribution facilities and combined larger tenants with an A+ location.

By contrast, the Cobb property, also comprised of three buildings, was an institutional-grade bulk warehouse, trucking-intensive park including a more manicured environment. "A real trophy property," says Hal Breedlove, senior vice president with Carter who, along with Riley, handled the sale for NORO.

But before Carter could actually handle the sale, they had to win the competition to be the exclusive broker for the properties. They did so after presenting NORO officials with their qualifications, their price designation and their selling strategy for the properties. The latter was particularly critical for this transaction.

The question for Carter was whether the industrial parks should be marketed for sale togetheror separately. Breedlove says there is a tendency in real estate to believe that the bigger the deal the more money the properties will bring. "But that is not necessarily true," he says.

And there were other considerations as well. Chief among them: Who would want to buy the properties?

While the geography, with all the parks being located in the Atlanta market, would interest some buyers in taking all three, the fact they varied in quality and type made them less likely to be bought by the same firm.

But the decision is also based on who the potential buyers may be. Carter tracks all active buyers from the largest institutional investors to high net worth entrepreneurs. Riley and Breedlove point out that there are generally three buyer types: institutional, European and entrepreneurial. "The institutional and European buyers are usually looking for the same thing," explains Riley. "A newer property, less than 10 years old, totally leased, no maintenance problems, a true trophy property."

Entrepreneurs, however, are looking for downtrodden properties with upside potential that they can upgrade and sell at a profit, says Breedlove.

Generally there are 350 to 400 active buyers from these categories. Riley and Breedlove pared this number down to about 100 potential buyers. And eventually to 30 or 40 of the firms they felt were most likely to make an offer.

After studying the potential buyers, Riley and Breedlove made the determination to market all three properties as a package to some prospects and to split the parks up for others with the two Gwinnett properties packaged together (although it was made clear the parks could be sold separately under the right circumstances) and the institutional-grade Cobb property marketed alone.

"We look at the property issues such as size, quality, rent rate, parking and others and define the most competitive subsets to break the properties down into for sales purposes," says Riley. "Some properties need to be tagged with better properties to increase their price. But in this case, we felt the three properties could sell on their own merits, if necessary."

The 30 to 40 top candidates were sent sales packages based upon their perceived interest, namely, buying all three properties, the two Gwinnett properties (together or separately) or the Cobb property.

Since obtaining the listing, Carter had collected data on the properties to develop these reports. They included physical, financial and market data on the parks. The physical data defines exactly what the property is; the financial information includes rent roll and cashflow information; and the market data introduces the buyer to the market by region of the country, metropolitan market and submarket.

"It takes about 30 to 45 days to produce desktop versions of the packages with color photos," Riley says. "And at this point we, the broker, have in the neighborhood of $20,000 invested in the packages."

The potential buyers take from two to three weeks to study the packages and gain an understanding of the properties. During this period Riley and Breedlove begin to gauge the interest of each prospect and telephone them (or perhaps the prospect will call) to set up tours of the property or properties in question.

"This entails going through the vacant and occupied spaces of the buildings and inspecting the marketplace as well," says Riley.

After the tours are complete, Breedlove explains that, as brokers, "you begin to feel the pulse of the deal, sense the momentum and are able to determine who the best buying prospects are."

"We are trying to gauge the amount of interest from the prospects," says Riley. "With European advisers, for instance, the actual buyer is the adviser's client. So, we want to make sure the client is actually interested and that the adviser is not just using this time to generate their interest."

At this point, Breedlove and Riley let the top prospects know that the seller wants to close the deal by a certain date, usually within 30 days. Breedlove says the move is not a set deadline to eliminate certain buyers, but rather is a gentle reminder to prompt the more interested parties that the time is ripe to make an offer.

When offers are made, they are studied to see which is the best option for the seller. In the NORO transaction, two bids were made for all three properties, three bids were made for the two Gwinnett County properties alone and a half dozen or so bids were received for each of the three properties individually.

Once the bids are received, negotiations can continue in one of two ways. The seller can choose to negotiate with all of the top bidders simultaneously or to choose the most qualified offer and negotiate with only that party.

Of course, once offers are made, price is just one issue in the selection of the right buyer. "The broker's experience comes into play again in determining the salability and close-ability of the potential buyer," says Breedlove.

"And the top bidder may not be the most qualified buyer," Riley quickly adds. "Is the interest really there? Can they finance the purchase? Our experience with buyers and their track record in purchases comes into play."

But often the buyer's reputation must be weighed against the size of the offer. "If a buyer is offering substantially more money than the next bidder but is less credible, you may gamble the deal will go through to get the better price," he says. "But again it is a matter of using your experience and judgment to make the best decision. And the high bid is sometimes not accepted."

In the NORO sale, Riley says the qualifications of the bidders were not an issue. "We had credible buyers, so price became a factor," he explains. "And as a seller that is what you hope. All other things being equal, you will take the highest price."

And indeed all three properties sold individually to the highest bidders.

Negotiating the contract usually takes about two weeks, followed by the normal 30 to 45 days for the buyer to conduct due diligence on the property. Another 15 days is the norm for closing after due diligence is complete.

Riley reports that the sale of the eight-building Gwinnett Gateway industrial park to Atlanta-based Brannen Goddard Co. closed in July, while the other two property sales were expected to close in August, as of this writing.

"Selling the industrial parks individually was more tedious," says Breedlove. "But the real question is did the strategy pay off for the seller. In this case we received a 10% higher price selling them individually than we would have selling them as a group. It definitely maximized the proceeds."

Fitting the space to the need In the tight Dallas real estate market, one of the largest leasing transactions in recent months has been Wyndham Hotel Corp.'s agreement to occupy 120,000 sq. ft. on two floors of the INFOMART, a 1.6 million sq. ft. property owned by Crow Family Holdings, Dallas, and Metropolitan Life Insurance Real Estate Investments Group, New York. (Crow Family Holdings is in the process of purchasing Metropolitan Life's interest in the building.)

Wyndham's move was sparked by several happenings. First, the downtown building which serves as Wyndham's current address, Bryan Tower, was about to be remodeled with all of the inherent inconveniences. Secondly, the company had outgrown its existing space. So the timing for a move seemed right.

But the lack of large blocks of vacant space in the downtown Dallas office market limited Wyndham's choices. In fact, the firm had looked at six other downtown buildings but, due to a lack of significant contiguous space, none worked.

"We represented the only block of space, north of downtown, large enough for their size requirement," says Philip Wise, investment manager for Crow Family Holdings.

"We liked the idea of having big blocks of square footage on the same floor," says James D. Carreker, chairman and CEO of Wyndham. "We have all of the fifth and sixth floors, so the geography is more convenient." Particularly so since Wyndham's information technology affiliate, The Kinetic Group, was already located in the building.

Built 12 years ago as a showplace for mainframe computers, the INFOMART building is currently a technology market center, home to more than 100 technology vendors. The building has an abundant power capacity, satellite communication technology, fiber optic telecommunications systems and a higher HVAC capacity to handle large computer operations than most buildings the same age. In addition, the property hosts more than 1,000 industry trade shows every year.

"It was a state-of-the-art office facility, and we did not even realize it at that time," says Wise. But the word got out. Most of the buildings tenants are technology companies or firms where technology is a focus.

"Other firms like to locate here to have access to all of the technology vendors, particularly in the telecommunications industry," says Chuck Sellers, vice president of leasing for INFOMART.

And the building was a perfect fit for Wyndham's other needs as well.

Carreker wanted the firm to remain downtown to be near support services such as banking and accounting, and also he was looking for a building that could provide sufficient parking for the company's employees.

Sellers says that while the building is technically in the Oak Lawn section of the city, which is considered uptown, it is only one mile from the downtown business district. In addition, the property has a parking ratio of about three per 1,000 sq. ft. of space.

Expansion space was another Wyndham need that INFOMART could meet. The building has another 35,000 sq. ft. of contiguous space which Wyndham has optioned in its lease. "No one wants to move into a space they are going to outgrow," says Carreker.

Sellers says Wyndham initially approached him early this year looking for 75,000 sq. ft., but the deal just kept growing. "Wyndham is a company that is constantly expanding, so it was apparent early on that they would need more space," he says. "The deal could well end up being 160,000 sq. ft."

Wyndham's merger with Dallas-based Patriot American Hospitality Inc., which is currently being finalized, was another reason for the interest in additional space. Patriot American also will be moving into the INFOMART space as soon as the merger is complete, which is expected sometime in the fourth quarter. Construction on the new space began shortly after the deal closed in mid-July, and Wyndham expects to begin moving in this month.

Carreker stresses that Paul Nussbaum, chairman and CEO of Patriot American, has been involved in the space negotiations as well.

One unusual fact for a deal this size was that no brokers were involved. But the participants say that was due to the special circumstances of the deal and the companies involved. The Crow family is the largest shareholder of Wyndham Hotel Corp., "and that relationship had a lot to do with the willingness to make this a direct deal," says Sellers.

"Secondly, James Carreker and Wyndham have a lot of real estate experience and savvy," he says, "and they did not feel they needed outside help to close the deal."

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