Avoid Losses: Analyze Material Tenants before Submitting a Final Bid on Commercial Real Estate Acqui
The relatively short due diligence window afforded to most buyers on commercial and industrial real estate acquisitions leaves little time to conduct effective tenant due diligence. Among the myriad challenges in conducting thorough due diligence is the availability of tenant financial statements. This may not be an issue when an asset has a diverse rent roll with minimal concentrations, but it can present obstacles toward closing a purchase and sale agreement (PSA) when one or more of the tenants is deemed to be a material tenant. Material tenants are often classified as representing at least 10% of the rent roll, though that share is often higher.
On rare occasions we have seen tenant credit dissolve a deal during due diligence. In those cases, it often has to do with the credit strength of one or more material tenants. While there is limited opportunity for conducting credit analysis on most private companies, it is prudent to analyze and understand credit on public companies prior to submission of a final bid and surrendering a non-refundable deposit.
Two examples come to mind where a material tenant’s credit derailed a potential acquisition. The first example involves a media company’s weak financial condition. TRA was retained during the due diligence period to evaluate Fuse Media, Inc., a specialty media company targeting younger a Latino and multicultural demographic
, which filed for bankruptcy in April 2019. The company had material debt obligations and operates in the highly competitive and rapidly evolving entertainment and media industry. Fuse Media’s channels had been dropped by Comcast and Verizon at the end of 2018, which ultimately led it to miss a $12.5 million interest payment due in January 2019. Our client ultimately learned of the credit and solvency issues through TRA’s review. However, the client only lost its non-refundable deposit as a result and was spared the challenges of acquiring an asset with a distressed tenant.
The second example involves a financial services company that was engaged in fraudulent activities in a foreign country. The company was private, but through TRA’s preliminary review of legal and criminal filings against the related entities, TRA uncovered risks associated with potential money laundering activities. The emergence of this detail drove our client to back away from the acquisition to avoid potential liability in the U.S. and to properly adhere to its fiduciary responsibilities.
The costs associated with up-front tenant due diligence are small in comparison to other diligence and deal costs. TRA provides intrinsic protection against potential credit risks associated with an asset acquisition. Reach out to TRA before submission of a final bid if there are any concerns arising from material tenants on any commercial or industrial acquisitions.