VENDOR VS. PURCHASER: HOW TO GET THE UPPER-HAND IN A COMMERCIAL REAL ESTATE NEGOTIATION
Negotiating a commercial real estate deal is both a battle of guts and a battle of wits. The addition or subtraction of one dollar or one condition can make the difference between a good deal and a bad deal for your client. There are a myriad of issues that arise during a commercial real estate transaction that are not usually dealt with in a residential transaction. The following are a few of the negotiation points that can add value for your clients and give you an edge in helping them negotiate a deal:
Price: Most deals come down to one important question: how much?! But what happens when there is no movement on the price? Generally, agreements will give the purchaser a chance to satisfy themselves as to the physical and financial conditions of a property during a due diligence period. The due diligence period is also a useful time to satisfy, or even eliminate, unnecessary conditions to make the deal more palatable and to give more bargaining power when discussing price. In addition, certain corporate structures require the approval of the purchase or sale price by the board of directors of the corporation before they are able to buy or sell. Front-end investigation of the corporate structures of both parties avoids costly delays and hurried decisions weeks or days (or sometimes hours!) before closing. The party who is more prepared usually comes out ahead in the deal.
Income Tax: So what happens if the price is a deal breaker? Commercial transactions often allow flexibility in allocating the type of income received. Things like HST, capital gains/income tax, etc. are often malleable when an expert in tax structuring is involved. Parties can save hundreds of thousands just by putting the right paperwork in order.
The purchaser should endeavor to negotiate the allocation of more of their purchase price towards the assets of the commercial deal (in a deal only involving real estate, the building on the property would be the biggest asset) since allocation of the purchase price to the building allows the purchaser to claim an annual capital cost deduction on the depreciation of the capital asset.
The vendor, on the other hand, if structured properly, should be negotiating a sale of shares in a holding corporation rather than a sale of assets from the corporation.
Harmonized Sales Tax (HST): HST is applied to a large number of commercial real estate deals and should be addressed in the agreement of purchase and sale; the APS should spell out whether HST is included in, or in addition to, the purchase price.
With proper advice, if both the purchaser and the vendor are HST registrants, they may elect to offset their HST obligations in order to avoid the tax altogether. However, this can put the vendor at risk: if the purchaser doesn’t pay, the tax authorities will move their target onto the vendor. To protect against this the vendor should have legal counsel knowledgeable in the area of tax and real estate in order to maximize the benefit and minimize the risks.