Interested to hear opinions on retrading both from the principal side and the brokerage side. Couple questions come to mind...
1.) As a broker are retrades expected regardless of buyer or is that truly filtered out? As a GP we all hear about "burning bridges" but is that just lip service? 2.) As a principal, how do you view retrading and when is it appropriate?
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It depends on the deal/situation. We only retrade if it's necessary such as if a DD issue came to light or if there are supply concerns during the negotiation period. As long as there is a legitimate reason to retrade then it's not frowned upon (at least in my experience). On the flip side, revealing a fucking affordable fee to the tune of millions of dollars the day before an AOS is to be signed/has already went through internal review thus setting internal expectations is fucking bullshit. It's not sly, it's just fucking stupid. But I guess that's where foreign money would pick up the asset.
But that's just me.
LOL was about to comment that this is so true, but then realized I wrote it!
Agree with the above. Unforeseen structural/environmental issues are fair grounds for a retrade and not reputation damaging.
Although there are some groups out there that seem to retrade for sport, which I find a bit off putting.
I work in MF REPE and it's something we see often enough when we're sellers, particularly with non-institutional buyers or private buyers. Problem is, for certain assets, private buyers are often the most aggressive on their pricing by a large margin, so we have to hand hold up to a certain point in order to get a sale to the finish line.
Where it's a problem is when these buyers, who are often very successful outside of real estate, think that they know everything and fixate on a particular DD item that in reality they either have flat-out wrong or are magnifying way out of proportion. They accuse you of trying to screw them, of hiding stuff, of manipulating things, etc. It can be a bit ridiculous. Often if these buyers attempt to retrade we tell them to pound sand and move on to a backup buyer or re-market the asset.
Retrades are not necessarily expected and from experience occur on 25% of transactions (dependent on strength of the market i.e. seller's / buyer's market). A good broker will protect against retrades by having a seller get third party reports done before the sales process and understanding how much capital a buyer underwrote as compared to the seller provided PCR. The higher the capital amount underwritten, the more buffer a buyer will have before they need to retrade for unforeseen capital reasons.
There is a reputation risk with retrades, and if a firm does this often, the broker will convey this to a future seller and could get passed over by a lower bid from a more reputable buyer because they know their number is more likely to hold. Retrades for BS reasons can tarnish a reputation with a brokerage, and the market will know when you dropped a deal...
Legitimate reasons include capex, environmental, zoning, tenant vacating, underwriting errors on the broker/seller's underwriting, etc., but in the case of a minor $ amount retrade, a more reputable buyer will just eat it, since no one is smart enough to know a property's true value down to the last few $100k and it's not worth the hassle/reputation damage.
(source: work at large brokerage in major market)
Good shit here.
We care way more about surety of close than we do a difference in $100k or whatever on price. If that number get's to be more like $500k or a $1mm higher than you take the high flyer and recognize that their is retrade risk. Flushing out the buyer's assumptions during best and final is key. If you know the property needs paint, has poly b piping, or whatever, and they aren't budgeting for it then you'll be better off in the long run.
We will only retrade for the items mentioned above with the addition of life/safety issues, and we'll usually try and flush most of those out before B&F.
Agreed, good stuff above. Keep in mind as well that different types of buyers/sellers will have different risk tolerance/aversion to certain items that might come up. For example, a private buyer/family office that plans to hold an asset forever would most likely not care as much about certain environmental issues, since they wouldn't have to worry about getting appeasing a lender, capital partner, or having a liquidity risk on the back-end. On the flip-side, a large institution may care a lot about the environmental for said reasons above, but may be more willing to absorb some potential/extra capital exposure to get the deal through.
EDIT: A legit re-trade is like sending back a meal at a restaurant because they messed it up (didn't cook it right, got it wrong, etc.). Different people will have different things they can live with in a meal or not (like a deal). A non-legit re-trade is viewed the same way as if you order your meal, eat 99% of it, then send back the last bite and tell the chef that you didn't like it for xyz reason. Bottom line, don't be an ass.
What about re-trades from lenders? How much time do your typical lenders spend on upfront due diligence prior to giving you a quote?
I know certain banks pride themselves in committing to their term sheet because they've essentially gone through their credit approval process before issuing a term sheet, but what about debt funds or other firms that try to close deals much quicker than banks?
Most banks are not getting to see the appraisal, PCA and ESA before issuing a term sheet. Sometimes, we will get those if the borrower already has those, but 99% of the times, we will only get those 2-3 weeks after issuing a term sheet. Retrading is really rare for our balance sheet business. It will absolutely kill our relationship with the brokerage community and especially with the clients who are often institutional so we will bend over backwards for them. On the other hand, in our cmbs business, which often have smaller loan amounts and non institutional clients, I feel retrading while not ideal is more frequent. CMBS deals are also constrained by rating agencies treatment on the deal and the fixed income market. So, there are more moving pieces outside of the lenders control that can kill the deal.
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