In previous chapters, we followed the story of Elevated Properties–our fictional developer–as they underwrote, acquired, capitalized, redeveloped, and leased Harbor Yards, their project. At long last, the site is stabilized and it is time to sell, hopefully returning capital to our lender and LP investor and generating a promote for the developer.

As a first step, Elevated Properties will speak to and eventually hire an investment sales broker. This is a type of real estate agent that specializes in selling investment properties such as Harbor Yards. Investment sales brokers tend to have more real estate finance expertise than other types of brokers.

Once hired, the investment sales brokerage team will produce an offering memorandum (“OM”) as well as a detailed data room on Harbor Yards. The OM will include information such as:

• High-level information on the property
• Rent roll, which is a list of all tenants and key lease terms. (Note that this is typically in the OM for office and retail tenants but only in the data room for multifamily tenants.)
• Market and submarket statistics and trends
• High-level property financials

The brokerage team will also likely produce a “teaser,” an abbreviated version of the OM which the owner is comfortable sharing publicly.  For a prospective buyer, viewing an OM typically requires signing an NDA.

The brokerage team will then assemble a list of prospective buyers. Given that Harbor Yards is a large, stabilized asset, buyers will likely be institutional acquirers looking to buy core assets. With the least amount of risk, core assets trade at the lowest cap rates.

The investment sales brokerage team would likely identify several categories of potential buyers:

• Institutional Allocators
• Pension Funds and Endowments
• Insurance Companies
• Sovereign Wealth Funds
• REITs
• Private Equity Core Funds

To kick off the process, the brokerage team will likely cast a wide net, sending the teaser out to its email list as well as putting in calls to the acquisitions teams of the likeliest buyers. Elevated Properties may have selected this particular investment sales brokerage team for its strong connections to likely potential buyers and track record of selling similar deals.

Interested and qualified prospective buyers will then schedule property tours with the investment sales brokerage team. The brokers will attempt to get a competitive bidding process going, setting a due date for initial offers (typically a few weeks after most prospective buyers received the OM) and perhaps giving buyers some guidance on the seller’s price flexibility and urgency.

Shortly after initial offers are due, many brokers will ask for “best and final offers,” perhaps from a subset of those buyers who put in the highest bids. After selecting the highest qualified bid, the seller will enter into a due diligence period (typically 60 to 90 days) with the likely buyer. At some point, the seller will likely ask the buyer to “go hard”, that is, put down a non-refundable “hard” deposit on the site that is nonrefundable unless serious issues are found with the asset.

Finally, at the end of the diligence period, the deal will close with money and title changing hands.

Real estate developers, investors, and brokers will pay close attention to the final sale price, as it provides an important cap rate data point. As a reminder from Chapter 3, the cap rate is the ratio of NOI to asset price–so the higher the purchase price, the lower the cap rate.

Note that not all developers choose to sell their assets upon stabilization. Many choose to refinance, replacing their construction loan with a (hopefully) larger, cheaper “permanent” loan from a bank or other financial institution. This scenario was briefly discussed in Chapter 3.

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