By Michael Dabah
December is by far the busiest time of the year for commercial real estate owners and investors, and the supporting parties that play a role in acquisition and financing transactions. It’s a grueling window when sellers, buyers, lenders, lawyers, brokers and other parties go into overdrive, trying to sprint transactions past the finish line, before January 1. There are many reasons why we see this push, and not all of them stay the same from year-to-year. Let’s explore a few reasons for this year’s December rush, and three ways to help ensure a smooth closing.
Why such a big rush?
Lenders have their foot on the gas at year end.
One reason for this is loan officers and other lending professionals often have compensation and bonuses tied to the volume and size of the deals they’re associated with in a calendar year. In addition, public lenders are required to disclose loan data, such as price-to-book ratios, and other lenders are out there trying to make their books look as good as possible before January 1. All of that translates into pressure on borrowers to close quickly, and not take advantage of provisions to adjourn or extend their closing unless it’s absolutely necessary.
Rent regulations had many unintended effects on the multifamily market.
Many multifamily owners wanted to refinance this year, because of an almost one-point drop in the federal funds rate. At the same time, New York’s new rent regulations, which went into effect on June 14, wrought havoc on the value of many multifamily properties. Any affected owners who were fortunate enough to have their refinance appraisal completed before June 14 were in a good position. They had a more favorable valuation in place, and consequently a more favorable loan-to-value ratio with more cash to withdraw. Appraisals typically expire after six months, so any owners still out there with pre-June appraisals are aggressively trying to close based on those appraisals.
Property buyers and sellers go into high gear around this time.
There are many reasons this happens, some of which are due to tax considerations that come with completing a transaction in one calendar year versus the next. Buyers who have favorable financing in place are also cognizant of the old adage “a bird in the hand is worth two in the bush.” In addition, not only do buyers and sellers like to start the new year with a relatively clean slate, but not closing now could have negative consequences for buyers, including less favorable acquisition loans and the need to raise more equity. All of this and other factors can affect a buyer’s willingness to waive certain seller conditions, in order to close before January 1.
With that in mind, how can you put yourself in the best position to close by the end of the year?
1. Get as much of the heavy lifting done before Thanksgiving.
The main reason for that is simple. Once Thanksgiving passes, it becomes exponentially harder to get parties to focus on new issues. If your closing documents haven’t been drafted before then, and all of the affected parties haven’t started paying real attention to the issues at play, your chances of closing before January 1 are slim. In addition, make sure to have all third-party reports, such as surveys, appraisals and environmental reports in hand by Thanksgiving, because those are significantly harder to obtain in December.
2. Try to close earlier in the month rather than later.
If there’s a last-minute issue that needs to be addressed, or even a legitimate wrinkle in a closing, typically those take more time to resolve in December. Because of that fact, you ideally want a closing date in early or mid-December, so you avoid the swath of people who could be out of pocket later in the month, including lenders, equity sources and service providers. Even if your time of the essence closing date is in late December, it would be wise to aim for an early December closing date if possible. That way, you’ll have a buffer to address the last-minute minutia that always arises, and enough time to address a potentially deal-killing problem that needs significant attention.
3. Beware of Christmas Eve and New Year’s Eve.
This year, Christmas Eve is Tuesday, December 24; and New Year’s Eve is Tuesday, December 31. That means on Monday and Tuesday of both weeks, banks and title companies will probably be short staffed and close early, and consequently wire transfers might not be operating at full capacity. That’s important, in part because most commercial acquisitions in New York City are time of the essence deals, under which a seller could terminate a contract and keep the buyer’s deposit, if they’re unable to close by a certain date. For that reason, you don’t want to be the unlucky one whose wire transfer is at the back of the line, on a day when there’s a risk of it not going through.