Arecent sale transaction I handled evolved from the outright sale of this 90 percent leased investment property to a joint venture. The would-be buyer
lost one of its equity investors and could not close; and the
purchase and sale agreement was rescinded. The out of
town owner/seller knew that the property needed help. It
needed better management, oversight of renovation, and by
consolidation of two burdensome mortgages. The mutually
beneficial solution became clear: a joint venture evolved
where the buyer invested some cash, but most of the equity
came from the seller, allowing for a reconstituted ownership
entity, bringing its owner on site management and financing
expertise to the tired but still valuable property.
The broker had, of course, worked hard to take the deal to the
contract stage. As contingencies fell (unfortunately not all of
them), and as the broker drew closer to his payday – the deal
failed, and the buyer walked away. To his credit, the broker
“hung in there” and helped the parties reach agreement on
the basic terms of a joint venture. Then it happened. The
seller and buyer re-examined the commission agreement and
obligation. Here are the many issues the broker suddenly
1. The exclusive listing term had long since expired, and
the term was never extended.
2. The post term protection period required negotiations –
and the broker saw little need to register the contract buyer
– after all, the deal was under contract.
The broker got past these issues, because the seller and buyer
recognized the broker’s continued role in the deal, and the
broker’s new listing agreement will have post expiration
protection for as long as negotiations with a procured buyer
continue, extending as long as the property is under contract.
The new form of listing agreement will also provide that if a
buyer signs a contract, that such prospect need not be named
in the post term registration letter.
This takes us to that next hurdle: how much commission is
due on the new JV deal, and in this new scenario, who pays
the fee? Let’s look a bit more closely at how the deal (and
the fee) changed. The old deal was a sale of $70,000,000,
and the commission rate was negotiated between the seller
and the broker, based upon the sale price. The new deal
looked something like this:
a. New property value of $74,000,000 because the seller
had new offers, and leveraged those offers in negotiating
his new deal with the old buyer.
b. There was debt on the property of $50,000,000 (to
be refinanced after the JV was formed, but temporarily
assumed by the JV).
c. Seller “sold’ or conveyed to the new investor, $6,000,000
of equity, which would allow the seller to take some cash
from the initial JV formation;
d. After formation, the JV investor would contribute
another $4,000.000 of cash to address the defeasance fee
and other refinancing expenses.
When the dust settled on the deal, our seller “sold”
$10,000,000 of equity, and retained a 90 percent interest
in the new JV. How is the commission to be computed, and
in the absence of explicit language in a listing agreement,
what is appropriate?
One approach is to simply apply the old commission rate to
the value of what was sold, that is, $10,000,000, resulting in
a dramatic reduction from that original sale commission by
almost 85 percent of the fee. Another approach is to apply
the commission rate to the new value of the property, which
even if increased to show the equity sold ($74,000,000
x ($10,000,000/$74,000,000) still results in a dramatic
reduction of the fee.
The buyer brings more to the table than its cash, including
management expertise, and gets a two year management
contract on the asset with the JV; and a construction
DOES YOUR LISTING AGREEMENT COVER ALL POSSIBILITIES
AND PROTECT YOUR FEE WHEN THE DEAL CHANGES?
COVER YOUR BASES
By Jim Hochman