In March, many pending commercial real estate deals were scuttled by COVID-19. But for one deal that was close to the finish line, Tonkon Torp helped implement a simple but unusual solution to overcome the uncertainty caused by rapid market disruption and complete a multi-million dollar deal led by Real Estate & Land Use Practice Group Chair David Petersen.
The North Albany Shopping Center contains a relatively standard mix of retail tenants anchored by a large grocery. By mid-March, Tonkon Torp’s client was well on the way to acquiring the shopping center in completion of a 1031 exchange, having already waived due diligence. When the pandemic gained a foothold in Oregon, the only remaining buyer’s contingency was to obtain satisfactory financing, an exercise that for a retail property depends in large part on an evaluation of the economics of the leases and the strength of the current tenants. But when tenants’ revenue fell off a cliff as the Governor’s shelter-in-place order took effect, the parties needed to find a new way for the economics of the transaction to make sense. And with the 1031 exchange and financing contingency deadlines looming, there wasn’t much time.
Ultimately, buyer and seller salvaged the deal and closed on April 1 thanks to a novel solution. The seller agreed to fund an emergency cash fund equal to 6.5% of the purchase price. Each party took the risk that the fund was either too large, or too small, to offset the landlord’s actual revenue losses due to COVID-19. And since the fund was financed outside of escrow, and with the support of the lender, the client was still able to maintain the original loan to value ratio and secure financing on acceptable terms.
This transaction required quick adjustments and fresh thinking, on the fly, as a new and wholly unexpected factor was introduced into the transaction mid-stream. For new deals, COVID-19 remains unpredictable, but at least it is a known factor that can be evaluated as part of the risk mitigation strategy and priced into the deal. This transaction is a great example of Tonkon Torp’s ability to pivot quickly towards solutions and bring deals to a close even under extraordinary and unforeseeable circumstances.