How to Improve Cash Flow During Property Acquisitions
“Cash is king, and it’s always better when it’s in your account.” Isn’t that the truth.
If you’re in commercial real estate and part of your business plan includes property acquisitions, there may be a surety bond product available for you to free up cash through the deposit period. There are a few surety markets supporting bonds that are held in lieu of cash deposits on real estate purchases.
This surety bond technically is a pseudo-performance bond on a real estate purchase contract. In a typical purchase scenario, once an agreement is executed, the purchaser would be required to post cash or an Irrevocable Letter of Credit (ILOC) with the seller or title company. Instead, a bond form is manuscripted to work much like an ILOC and provide the necessary protection to the seller. The bond forms are written with a stated cure period for a breach (e.g. 20 days) that effectively makes it a liquid guarantee for the deposit.
The biggest hurdle is simply getting the seller to accept this bond in lieu of the other deposit forms. This is something that needs to be negotiated at the time of the purchase and not after the fact. Since this is a newer concept in commercial real estate, you may have to educate or negotiate to get the bond accepted. It’s important to note that surety bonds are commonplace in development and construction. So, the idea of an insurance company contract as a form of guarantee is definitely not a new one. Surety bonds have been around in the U.S. for more than 150 years.
Additionally, the purchaser will need to qualify for the bond in order to receive it. As real estate entities can be built around Special Purpose Entities (SPEs), it’s important for the qualifying entity to understand that this is a credit scenario and one needs to offer indemnifying support that sufficiently supports the guarantee. A consultation with a qualified, surety representative will help with prequalification for this product.
It may well be worth your while to free up cash for other areas of your business, while keeping real estate acquisitions moving toward closing.
Talk to a member of the ‘A’ Team for more ways to minimize risk while freeing up cash flow.
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