Are You Smarter than the Undergrad Business Club at Rider University? A Case Study in Negotiating the Purchase and Sale of Real Estate

A few months ago I received a call from a high school football team mate.

"Lenza, my son Brendan is in charge of scheduling guest speakers to address Rider's Business Club. Can you help him out?"

Brendan and I traded texts, set a date and there I was before sixteen young, fresh faces yearning for knowledge. Okay, maybe not yearning. More like killing a cloudy Thursday afternoon.

I have to admit I dug the moniker of "Guest Lecturer" even for one day.

I chose "How to Price an Asset" as my topic, but don't buy the red herring.

I staged a negotiating competition between three groups of students: two teams represented opposing buyers with similar needs and the other team represented the seller of the commercial property.

Here are the "secret" case studies for all three teams. There were no rules to the negotiation because, quite frankly, there are few rules in the real world of buying and selling property. Each party danced upon the fine line of subterfuge, feigned interest, bluffed intentions and bravado.

How did the kids do in the mock Thunderdome? Realize that not one of the students has ever negotiated the purchase or sale of real estate before.

1. One team decided to adopt an aggressive, adversarial tone from Jump Street, down to where they sat at the bargaining table.
   
2. One team succumbed to the temptation of minutia, arguing about a fictitious road one team concocted.
   
3. The selling team chose to ignore the comp's and set an unrealistic list price that both teams eventually rooted out as mythical.

After two rounds of timed, heated negotiation neither team could agree to terms. Afterward we reviewed the process and here are the students' observations.

• "I got too emotional. I made it about winning instead of achieving the objective, which was to buy the property."
• "We couldn't agree to lower the price amongst ourselves."
• "You tend to think you have all the time in the world to hammer out a deal. You forget the clock is a silent enemy."

I went into Rider University as the guest lecturer. I walked out the student.

How do you think you would do?

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Green International -- Seller

Green International owns a 150,000 square foot manufacturing facility it built two years ago. Green uses the complex for the processing of glutein-free foods: potato chips, cookies, cereals. The facility is designed for either liquid or solid foodstuff processing. Green International is headquartered in Denmark and the worldwide recession has prompted the company to dispose of assets outside of Europe.

Green International paid $3 million for the property and spent an additional $5 million to build the plant. Its “net” cost of the facility is $53.34 per Square Foot [$3,000,000 + $5,000,000 divided by 150,000 square feet].

You are a member of Green International’s Property Management Division. The senior management has issued your negotiating team an objective that includes (a) effect a sale as soon as possible for as much as possible, the higher the better; and, (b) do not sell the facility below a discount of 10% of cost [$53.34/Square Foot - 10%].

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Red Draft -- Buyers

Red Draft Incorporated is a micro-brewery that has just finished its second round of private financing. Red Draft pays an enormous lease rate to rent an old, inefficient 50,000 square foot facility, a lease due to expire in 90 days. Red Draft beer has taken off since its introduction and large orders continue to stream in from its Madison Avenue advertising slogan.

The Board of Directors has assembled your team to procure the rights or ownership of a facility that minimally doubles current capacity. The C.E.O. has stated at the recent management counsel that “Red Draft needs to triple our capacity as soon as possible, based upon our forecasts of demand.”

The company has allocated a cash budget of $8,000,000 for the project; however, Red Draft can tap into an additional line of credit from an Investment Bank for an additional $2,500,000. The scout team of Red Draft has reported that a comparable 150,000 square facility (called “Happy Harry’s Jersey Devil Moonshine”) a half a mile away from Green International’s facility sold for $4,875,000 in late February.

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Blue Taco Chips -- Buyers

Blue Taco Chips Inc processes and distributes a line of blue corn products under its signature brand “Blue For You.” The senior management of Blue Taco Chips recently took the company and brand private in a leverage buy-out from Orvieto Ortego, an Italian-Spanish conglomerate.
Orvieto Ortego, the parent company, has filed notice with Blue Taco that it is rescinding its right to use Orvieto Ortego’s 125,000 square foot food processing plant.

Further, Orvieto Ortego is calling its short-term loan of $2,000,000 that it extended to Blue Taco. Repayment is due within 30 days.

Blue Taco lists assets of $9.5 million in cash and expects a consortium of Wall Street banks to approve a $3 million line of credit once the due diligence is completed. Blue Taco estimates the line of credit won’t be available until 60 days. The scout team of Blue Taco has reported that a comparable 150,000 square facility (called “Sin City Spirits”) one mile away from Green International’s facility sold for $5,500,000 in early March.