Preemptive Bids – A Lawyer’s Dream or Nightmare
By: Jonathan L. Mechanic
Fried, Frank, Harris, Shriver & Jacobson LLP
More than 50% of total real estate investment sales volume is concentrated in the
following top eight investment markets: (1) New York (2) Los Angeles (3) Washington DC (4)
San Francisco (5) Chicago (6) Dallas (7) Atlanta and (8) Boston. New York and Washington
DC have the lowest cap rates, highest price per square foot prices, and among the highest
aggregate transaction volumes in the United States. The New York market is especially “hot.”
The Manhattan market experienced a record-setting year in 2005, in which almost $21
billion in trades were executed. This trend has continued in 2006, with first quarter volume of
$2.7 billion, up almost 29% from the same period last year. We are seeing the rental market
achieve new heights. In the top class A buildings— the General Motors Building, 9 West 57th
Street, 712 Fifth Avenue, the Seagrams Building— rents are topping $100 per square foot
(sometimes by a wide margin). Rents in the new New York Times Building on 8th Avenue and
46th Street are achieving numbers in the $70s and $80s per square foot. Office prices are
similarly skyrocketing with cap rates compressing in some cases to below 5% and rental
projections for computing future rental streams having a rosy hue. Sale prices for trophy assets
like 280 Park Avenue (Boston Properties to Istithmar) and 1211 6th Avenue (Jamestown to
Beacon Properties) are setting records. It is against this backdrop that this paper examines the
concept of the preemptive bid by examining the steps of a hypothetical transaction for the sale of
a trophy property (the “Property”).
1.
The Traditional Sales Process
a.
Owner decides to sell (or at least market): The first critical step in having a
sale transaction is to have a willing (or even a hesitant) seller. For our transaction
to proceed we need an owner of a property to make the decision to sell or perhaps
take only the first baby steps in the process — be willing to entertain offers and
“test” the market. Our hypothetical seller wants to see if all those numbers that
people are talking about out there are “real” and available for their Property.
b.
Selection of broker: If a seller is proceeding along the traditional path of selling
his or her property, the seller is looking to engage the services of a broker to
advise on pricing and marketing, to assemble and present the sales information on
the building, to scour the market for the best potential buyers, to qualify bidders,
to advise the seller on the attributes of a potential bidder — who is most likely to
close?; who has their money lined up?; and who is likely to be difficult or easy in
the closing process?
c.
Preparation of offering materials: The broker will review the materials
furnished by the seller and put them together in a handsome package with the
standard disclaimer in the front (and back); descriptions of the market;
descriptions of the Property; a set of projected cash flows; and beautiful pictures
of the Property.
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2.
d.
The book comes out: The offering materials are ready and get distributed to the
“usual suspects” and probably to some new additions to the list who have come to
town and announced that they are here to participate in the “games.” The most
recent new entrant is the Dubai-based Istithmar which has collected trophies such
as 450 Lexington Avenue, 230 Park Avenue and 280 Park Avenue.
e.
Qualification of Bidders: The brokers should be qualifying the bidders: Are
they litigious? What deals have they closed recently? What do the sellers who
have been on the other side of the table from the bidders have to say about them?
Who are their banks? Where does their equity come from?
f.
Requests for Bid: A sample request for bid is attached to these materials as
Schedule A. It asks the purchaser to specify a price and identify the source of
funds; specify any approvals that are necessary; identify any contingencies (there
should be none); identify timing (it should be soon); identify any due diligence
required (note that due diligence will be done simultaneously with the bidding
process); specify the deposit amount (10% being the routine request); specify
legal counsel; and specify financial and transaction references.
g.
Second Round: After the initial bids come in, the top tier of bids make it into the
second round. These are the bidders whom the broker believes are the best
candidates to be the real estate equivalent of the winner of “American Idol.”
h.
Distribution of Contracts: Those bidders who have now made it into the second
round, will now generally receive a copy of the proposed contract so that they can
mark it up or not mark it up — as they know the broker and the seller will
consider the scope and nature of their comments in selecting the winning bidder.
i.
Best and Final: The bidders from the second round are now asked to make their
“best and final” bid. Sometimes it is actually the “best and final”, but more often
is a prelude to one or more rounds of “best and final” until the winning bidder is
selected.
When can a preemptive bid be made?
a.
Before the Property goes on the market: An interested purchaser should call the
seller and express interest in the Property. Is there a price at which the owner
becomes a “Seller”? Before making an offer, interested buyers should amass as
much information about the Property as possible without a formal due diligence
process, either directly or through a broker who has a relationship with the
proposed seller. The clear advantage of bidding at this early stage is that if you
can make a deal, there is no competing bidder. (This is often spoken about as an
“off market” transaction.)
b.
Before bids are solicited or come in: The more buyers who are interested in the
Property, the more difficult the process becomes. At this point, the owner is
definitely a seller, but there is also likely to be a broker involved, who will be
looking to prove their value added and to maximize proceeds. There is still
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uncertainty about the amount of proceeds that will be generated from the sale, but
the seller and broker will try to create a feeding frenzy. A successful purchaser
must be able to convince the seller of the ease and certainty of execution of the
transaction. Having a relationship with the seller and/or broker and/or a stellar
reputation in the marketplace are key, as is the reputation of the purchaser’s
counsel.
3.
c.
Before Best and Final: At this point, the game changes significantly. The seller
has engaged in the process and other bidders have invested time and money and
are likely to be emotionally involved in the transaction. Yet still, a sale can
happen at this late stage. On the sale of the New York Times’ Headquarters
building, the bid was accepted on a Friday, the documents were signed and
negotiated over the weekend, and the balance of the bids were due the following
Monday.
d.
With the other bids, if it is an offer that can’t be refused: It is not about
getting a great deal, it is about getting the deal. An aggressive, entrepreneurial
buyer, who is willing to take to take a risk, is most likely to be successful. The
most attractive buyer offers a good price, a quick contract, hard money and
certainty of closing.
Critical Elements of a Preemptive Bid
a.
Pricing at high end of the range: It is hard to do a preemptive bid and not be at
the top of the range of what the seller has come to expect as its sale price.
b.
Credible buyer: No seller wants to enter into a contract and have a fight over
whether the purchaser is willing or able to close. Certainty is critical.
c.
Certainty of Financing and Closing: Where is the debt and equity coming
from? Are the commitments hard? Are they reliable?
d.
Meaningful Deposit at Risk: The larger the deposit, the better the seller feels.
We have seen deposits as high as 20%.
e.
Selection and Approach of Counsel: Look for a business minded lawyer with a
good reputation in the marketplace. An attorney who has a good relationship with
the broker or seller is an invaluable asset. It sets the stage for the likelihood of
success.
f.
Accelerated due diligence: The Buyer must know what he needs to know; due
diligence “outs” make preemptive bids unlikely. A sample contract based on a
transaction where the purchaser was prepared to close on a trophy asset without a
due diligence period is attached as Schedule B. In that particular transaction, the
winning bidder made only one change to the contract—removing the due
diligence period.
g.
Relationships of Purchaser or Purchaser’s Counsel with Broker or Seller:
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These relationships, along with the purchaser’s reputation and their lawyer’s
reputation in the marketplace are the key to success.
4.
5.
Due Diligence Areas
a.
Environmental
b.
Engineering
c.
Legal compliance
d.
Leases
e.
Contracts
f.
Brokerage agreements
g.
Title
h.
Violations
i.
Litigation
Contracts: Sometimes contracts can be more fair in the bidding process than they
otherwise would be. Decide what you need as opposed to what would be nice or what
you generally ask for.
a.
Representations:
1.
A purchaser should expect the seller to make representations that: (i) all
the leases affecting the Property have been provided to purchaser, that
they are true, correct and complete and there are no defaults under the
leases; (ii) the current rent roll is true and correct; (iii) there are no unpaid
work allowances or other inducements or leasing commissions; (iv) a
complete list of litigation commenced against the seller or the seller’s
property manager in connection with the Property has been delivered to
purchaser; (v) all the brokerage agreements have been provided to
purchaser and they are true and complete copies of the agreements; (vi) a
correct and complete list of all employees presently employed by the seller
or the property manager and their status as union or non-union employees
has been delivered to purchaser along with true, complete and correct
copies of all employment agreements, severance agreements and union
contracts, if any for each employee; (vii) a true complete and correct list of
the service contracts in place has been delivered to the purchaser; and
(viii) the personal property has been fully paid for and is owned by the
seller free and clear of all liens and encumbrances, except as set forth on a
schedule which has been provided to the purchaser.
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2.
6.
A purchaser should not expect a seller to include representations in the
contract that can be learned from due diligence, such as: (i) the condition
of the Property; (ii) environmental issues; (iii) compliance with laws, such
as zoning regulations.
b.
Survival of Representations: 90 days to one year.
c.
Baskets: A “Basket” is a minimum amount of damages that a purchaser must
incur as a result of a seller’s false or incorrect representations in order for the
purchaser to be able to go after the seller for damages. It is usually in the range
$50-$250,000 depending on the size of the deal. Do they go back to dollar one?
d.
Caps: A “Cap” limits the amount of liability a seller can have as a result of
making a false or incorrect representation. They are usually 2-5% of the purchase
price.
e.
Contingencies: Tailored to particular transactions, for example, where a
governmental approval is required; the less the better. No contingencies are the
best contingencies from a seller’s perspective.
f.
Contract Period Covenants: Standard covenants that a seller should make to a
purchaser for the interim period between the execution of a contract and closing
should include: (i) the seller will not modify, terminate or waive any of the
landlord’s material rights under current leases or enter into any new leases; (ii) the
operation of the Property will continue to be generally in accordance with past
practices; (iii) the seller will maintain the Property and casualty insurance policies
and the liability insurance policies; (iv) the seller will not settle any pending tax
proceedings for the tax year in which the closing is to occur without the prior
written consent of the purchaser; (v) the seller will be responsible for making
bonus and severance payments to the employees accrued on or before the closing
when such payments are due; (vi) the seller may in the ordinary course of
business, extend, renew, replace or modify any contract or enter into any new
contract, provided that the terms thereof are commercially reasonable and
competitive and the terms thereof are cancelable upon no more than 30 days prior
written notice (and in any event prior to closing), without premium.
g.
Timing of Closing: ASAP
h.
Time of Essence: Generally, a requirement with a short extension of the closing
date for the unknowable or the right to buy an extension.
Examples of Preemptive Bids
a.
Fred F. French Building, 10 LaSalle: A group of New York investors paid
$258 million for two office towers owned by the Metropolitan Life Insurance
Company, including the Fred F. French Building, a 38-story landmark on Fifth
Avenue at 45th Street, and a 37-story tower in Chicago. (NY Times, 12/24/02)
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7.
b.
New York Times Building: Tishman Speyer Properties won the bid for The
New York Times’ 750,000 s/f headquarters on West 43rd Street between 7th and
8th Avenues. Tishman offered a preemptive bid of $175 million and a plan to
convert the 15-story building into office and ground floor retail space. (NY Times
11/10/04)
c.
Sears Tower: A MetLife affiliate agreed to sell the Sears Tower for over $800
million, a little more than six months after it took control of the building. MetLife
expected an after-tax gain of about $90 million on the deal. (Wall Street Journal,
3/12/04)
d.
General Motors Building: Conseco Inc. sold the GM Building to Macklowe
Properties for $1.4 billion, the highest bidder in an auction of the 50-story office
tower located on 59th Street and 5th Avenue. (Wall Street Journal, 9/29/03)
e.
450 Lexington Avenue: Dubai-based Istithmar was the winning bidder, agreeing
to pay about $600 million for the 40-story, 905,000-square-foot office tower at
450 Lexington Ave. (NY Times, 6/6/06)
f.
1211 Avenue of the Americas: Beacon Capital Partners agreed to purchase the
45-story 33-year-old office building, which is located between 47th and 48th
Street, for more than $1.5 billion. Beacon was among more than 30 investors that
bid on the building. The transaction is believed to be the second-largest singleasset commercial real estate transaction in the U.S. (NY Times, 7/12/2006)
Dream or Nightmare
1.
Dream – Your client is the winning bidder of a trophy asset while your
competition is determining their bid.
2.
Nightmare – Apologies to wife and family will follow for several weeks
afterwards.
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SCHEDULE A
Mr. Big Buyer
Major Money Fund
Madison Avenue
New York, NY l0022
Re:
700 Fifth Avenue
Bid Instruction Letter
Dear Mr. Buyer:
Thank you for your interest in 700 Fifth Avenue.
We are requesting bids no later than June 30, 2006. Please direct your written offer to
Mr. Smart Broker by 12:00 noon. Submission of your offer should include information about
your company. We will forward this to ownership along with your bid. Therefore, please
forward summary information and financial/transactional references to our attention
immediately.
Once offers have been submitted and reviewed, the top few bidders will in all likelihood
be invited to participate in a second round. However, being selected or invited to a second round
is entirely up to the discretion of Ownership. The terms to be delineated in your offer should
include:
1.
Purchase Price. Please specify the purchase price and clearly identify the source
of funds and provide evidence of their availability for this purchase. Please indicate any
approval process required for you to proceed with this transaction and indicate timing or dates
for the various approvals.
2.
Conditions. The offer should be free of any contingencies. The Property will be
sold “As is. Where is.” Please confirm that you have reviewed the Offering Materials and have
toured the Property.
3.
Timing. Ownership intends to negotiate a contract following the selection of a
buyer and to sign a binding contract upon the completion of these negotiations. Please indicate
your availability and ability to begin negotiations.
4.
Due Diligence. Please specify the amount of due diligence you have completed
and the length of time you will require to complete your due diligence. Ownership is seeking a
due diligence period to be completed concurrent with contract negotiations.
5.
Deposit. A deposit will be required upon the signing of the Purchase and Sale
Agreement. We are seeking a nonrefundable earnest money deposit of 10% of the purchase
price.
6.
transaction.
Legal Counsel. Please identify the legal counsel you will be using on this
7.
References. Please provide transactional and financial references, including the
name of the seller(s) for the most recent asset(s) you purchased.
The Owner may, in its sole discretion and without notice to any person: (a) withdraw
from any discussion or potential sale, or (b) sell all or any portion of the Property to any other
person, or (c) reject any offer or discontinue any negotiation for any or no reason. The Owner
shall have no legal or equitable commitment or obligation to any person making an offer with
respect to the Property unless and until a written contract with respect to the Property has been
fully executed and delivered by the Owner and such person.
We appreciate your interest in the 700 Fifth Avenue. In order to help you meet the time
frame specified above, we are available to assist you with additional property tours as well
providing any supplemental information you may consider helpful in preparation of your offer.
If you have not scheduled a tour as of yet, please call our office to set one up
immediately. We look forward to receiving your offers on or before June 30, 2006.
Please call us directly if you have any questions.
Sincerely,
Smart Broker
SCHEDULE B
(Sample Contract)