The Highest Price Is Not Always the Best Deal: Why Commercial Property Decisions Need to Look Beyond the Headline Figure

In commercial property, it is entirely understandable that an owner’s first instinct is to seek the highest possible rent or sale price. After all, maximising value is usually one of the principal objectives of any property transaction, and owners expect their advisers to negotiate hard on their behalf.

But the highest figure on the table does not necessarily represent the best deal.

Experienced commercial property professionals look at transactions as a whole. Price matters, sometimes considerably, but so do the financial strength of the party taking the lease or making the purchase, certainty of completion, timing, lease structure and the conditions attached to an offer.

Leasehold Transactions
Consider a landlord choosing between two prospective tenants. One may offer £100,000 per annum while another offers £75,000. It is tempting to regard the first as automatically superior.

However, what if the £75,000 tenant has a financially stronger business, provides a parent company guarantee, wants a longer lease and is prepared to proceed immediately? Conversely, the higher bidder may be a relatively new company seeking significant incentives, break provisions and extensive conditions.

The additional £25,000 of headline rent can quickly become insignificant when considered against the risk and overall value of the transaction.

A Freehold Sale
An offer of £2 million is not necessarily preferable to an offer of £1.9 million if the higher bidder remains dependent on bank funding, board approval, planning investigations or the disposal of another asset.

A well-funded purchaser offering slightly less, with solicitors appointed and the ability to exchange contracts quickly, may ultimately represent the better commercial decision.

The ‘Risk-Adjusted’ Value of the Transaction
Experienced commercial property advisers look at what might be described as the risk-adjusted value of a transaction.

Important considerations include:

• Purchaser or tenant covenant;
• Certainty and speed of completion;
• Rent-free periods and incentives;
• Lease length and break clauses;
• Repairing and service charge obligations;
• Guarantees and rent deposits;
• Conditions attached to the offer;
• Planning and due diligence risk; and
• The financial cost of the property remaining vacant.

Knowing When to Stop Negotiating
There is another important factor: knowing when to stop negotiating.

Owners naturally want their advisers to improve an offer, and good advisers should do exactly that. But there comes a point where pursuing the last increment of rent or price can jeopardise an otherwise excellent transaction.

Losing a good tenant for an additional £2 or £3 per square foot can prove extraordinarily expensive if the building subsequently remains empty for another six months. Business rates, service charges, insurance, finance costs and lost rent can quickly outweigh the additional income being sought.

Commercial property negotiations therefore require judgement as well as arithmetic.

The objective is not simply to achieve the highest asking rent or price. It is to achieve the best commercially deliverable outcome for the owner.

White Commercial’s Advice
At White Commercial, our role when advising owners is therefore not simply to negotiate the headline number. It is to assess the strength, risk and commercial implications of the entire transaction and advise where the optimum deal sits.

Ultimately, successful property transactions tend to share the same characteristics: the right price, from the right party, on the right terms, with a high degree of certainty that the transaction will actually complete.

That is often far more valuable than simply being able to say that the highest offer was accepted.