M&A and real estate tend to be seen as separate worlds: One is about buying and selling companies and divisions. The other is about wheeling and dealing over rent levels, CAM charges, parking spaces, kickout clauses and other minutiae.
But property-level considerations are a huge factor in the value of M&A transactions. If the company you’re buying or selling has leases on its books—offices, clinics, warehouses, retail stores, restaurants, fitness facilities, theaters, etc.—there may be an opportunity to take a more strategic approach to core and non-core real estate
Sharper Due Diligence
PE partners and high-level dealmakers should be going more granular in their real estate due diligence. Don’t be content with pre-pandemic appraisals and other reports on the acquisition target’s real estate. While there can be pressure to pull the trigger quickly on a deal, it still pays to closely scrutinize the value-driving factors at individual locations. Consider some of the real estate changes since “the before times.”
Waived clauses. In negotiations with landlords early in the pandemic, many companies gave up valuable protective clauses in areas such as co-tenancy, exclusives, no-build zones and REAs for short-term help. Today, they are hamstrung by these concessions.
Deferred maintenance. Remember when tumbleweeds were blowing through central business districts? Shuttered for months on end, many restaurants saw the quality and condition of their real estate deteriorate.
Growth opportunities. Markets have shifted, from office workers spending more time at home, to consumers increasing their e-commerce spend.
Both M&A buyers and sellers can drive value by grappling with these changes. Thanks to newfound leverage, retailers could renegotiate those concessions. Deteriorated properties could be reappraised or repaired. Analytics and geospatial modeling could reveal new growth and relocation opportunities in response to shifting trends.
Other factors that could be put under the microscope include rents, landlord negotiating practices, and remaining lease term and optionality.
Optimizing real estate upfront—and clearly communicating these improvements to buyers—can allow M&A sellers to reap millions of dollars in additional value. Buyers can squeeze greater post-transaction value out of acquisitions through sharper due diligence. For example, if the company was paying above-market rents across its portfolio, the buyer could renegotiate those leases to lock in favorable terms on the best real estate and/or add lease options that confer greater flexibility.
Lastly, many companies have office and warehouse leaseholds. Systematically subleasing this space or selling leases outright can drive further value.
A major real estate push may not always be necessary, but asking tougher questions is always a smart move.