Real (Estate) Negotiations Stories #5: How I Raised Profits on a $73M Deal Without Raising the Price

Fernando Levy Hara, AMDP ’09, leverages his decades of experience in real estate in Real Estate Negotiation Essentials: Dealmaking Techniques & Simulation, where participants learn impactful real estate negotiation techniques and immediately apply them in an online dealmaking simulation.

One of our most popular and entertaining instructors, Fernando reinforces his session teachings with personal stories. We wanted to share some of those stories to preview the program in this multi-part series.

Integrative Negotiation: It’s Not Just About the Price

In 2019, I completed the development of a 280-unit rental community in Sarasota, Florida. The lease-up progressed very quickly: within just six months, the property was already 70% leased.

Given the strong leasing velocity, we decided to put the property on the market. The timing seemed ideal. Rental rates were coming in significantly higher than the projections in our original pro forma, and investor demand for multifamily assets in Florida was extremely strong. Population growth in the state was accelerating, creating more demand than supply for rental housing. As a result, prices for rental communities were increasing rapidly, and cap rates were compressing with each new transaction.

We hired a brokerage firm that specialized in institutional multifamily sales. Over the course of three months, the broker marketed the property extensively, visiting institutional investors nationwide and conducting several property tours.

The sale was structured as a private auction, with a deadline for prospective buyers to submit their offers.

When the deadline arrived in September, we were pleasantly surprised: we had received 14 qualified offers, ranging from $63 million to $72 million. After reviewing the offers and evaluating each buyer’s ability to close, we narrowed the field down to the three most qualified groups.

Their bids were:

• Group A: $70.3 million
• Group B: $71.2 million
• Group C: $73.4 million

At first glance, the decision seemed obvious. Group C had submitted the highest offer. However, in complex negotiations, price alone rarely tells the whole story.

“One of the most important lessons we have learned over the years is that price is only one component—albeit an important one—of a successful negotiation outcome.“”

Instead of focusing exclusively on price, we began negotiating the due diligence timeline with all three groups. Our preference was to close before December 31, because doing so would provide certain tax advantages that would increase the investors’ net profit.

Group C, the highest bidder, proved to be quite inflexible. They required at least six months of due diligence and requested an additional two-month extension option to secure financing. This would have pushed the closing to May 2020, which was far from ideal for us. (Of course, at the time we had no idea that by then the world would be dealing with the COVID-19 pandemic, which would have made closing even more uncertain.)

The other two groups were far more flexible:

• Group B believed they could close in December once their financing was secured.
• Group A committed to closing in December because they initially did not require financing.

We then began negotiating further with these two groups. We informed them that another bidder had offered $73.4 million, encouraging them to improve their bids.

After several rounds of negotiation:

• Group A increased their bid to $72.6 million
• Group B increased theirs to $72.9 million

Despite these improvements, neither group could match the $73.4 million offered by Group C. At that point, we introduced a new dimension to the negotiation:

We asked whether either buyer would consider purchasing the corporation that owned the property, rather than acquiring the real estate asset itself.

“In Florida, selling a property typically requires paying documentary stamps and transfer taxes totaling about 1% of the purchase price, which are paid by the seller. However, these taxes are not triggered if ownership is transferred through the sale of the corporate entity.“

On a transaction of this size, that meant approximately $700,000 in tax savings.

There was also a benefit for the buyer. If the property itself were sold, the county would likely reassess the property value, resulting in an estimated $300,000 increase in property taxes the following year. By purchasing the corporation instead, the buyer could potentially avoid that reassessment.

• Group A declined immediately. This is common because acquiring the ownership entity means the buyer may inherit potential liabilities, such as pending claims from subcontractors or service providers.
• Group B had similar concerns but was open to thinking creatively about how to mitigate the risk.

We proposed a solution: at closing, we would place $1 million in an escrow account for 1 year to cover any potential claims that may arise. If no issues arose during that period, the escrow funds would be returned to us.

Group B accepted the structure. The final decision became clear.

“Although Group C had offered $73.4 million, the corporate-sale structure allowed us to save $700,000 in transfer taxes, making Group B’s $72.9 million offer effectively worth $73.6 million to us.“

We closed the transaction on December 28, 2019, just in time to celebrate the New Year with our families in a very good mood.

Lessons from the Negotiation

1. Price is only one dimension of a deal.
   In complex negotiations, focusing solely on the headline number can obscure other elements that create value.
2. Use an integrative negotiation strategy.
   By adding additional variables to the negotiation, you can expand the “pie” rather than simply fight over it.
3. Fractionate issues whenever possible.
   Breaking a single issue into multiple components—price, timing, payment structure, tax treatment—creates opportunities for trades.
4. Offer concessions that are low-cost to you but high-value to the other party.
   These trades often unlock agreements that seemed impossible at first.
5. Think creatively.
   The best deals are often structured by introducing new variables that were not originally on the table.

About the Program

This focused program, taught by a real estate developer and expert cross-border dealmaker, distills negotiation best practices into an easily applicable form for real estate professionals.

Learn negotiation dynamics to prepare yourself – on behalf of your organization or client – to understand parties’ respective interests, claim and create value, and resolve differences to close a deal – and bring your vision to life.