Question 1

What is a break-up fee and how large should it be?

Accepted Answer

A break-up fee is compensation paid to the stalking horse buyer if a higher bid is approved at auction. It compensates the stalking horse for their due diligence investment and the economic benefit they provided to the estate by establishing a price floor. Current ranges in commercial real estate stalking horse deals: 1.5-3% of purchase price. Courts scrutinize break-up fees and will not approve them if they are so large that they chill competitive bidding, 3% is typically the upper limit that courts approve without extensive justification.

Question 2

What is an expense reimbursement in a stalking horse agreement?

Accepted Answer

Expense reimbursements are separate from break-up fees and reimburse the stalking horse for documented transaction costs (legal fees, environmental studies, appraisals) if they are outbid. These are typically capped at a fixed dollar amount or a percentage of purchase price (0.5-1.5%). Courts treat expense reimbursements differently from break-up fees, they are viewed as more palatable because they compensate actual costs rather than providing a windfall.

Question 3

Can any buyer become a stalking horse, or is it restricted to institutional investors?

Accepted Answer

Any buyer can be a stalking horse if they can satisfy the fiduciary that they have the financial capacity to close the transaction and the legal structure to sign a court-approvable purchase agreement. Debtors and receivers do conduct informal qualification reviews before accepting a stalking horse bid. Demonstrating capital sources (cash, committed financing), relevant acquisition experience, and having experienced legal counsel all help qualify as a stalking horse bidder, regardless of investor type.

Question 4

What happens to my deposit if I am the stalking horse and am outbid?

Accepted Answer

Your deposit is returned promptly after the court approves the competing bid, typically within 3-5 business days. The purchase agreement negotiated for a stalking horse position will specify the deposit return mechanics. Your purchase agreement terminates, your deposit is returned, and you receive your break-up fee (and expense reimbursement if included). The return of deposit and break-up fee payment are typically simultaneous with or shortly after court approval of the competing sale.

Question 5

How do I find commercial real estate stalking horse opportunities before they are publicly announced?

Accepted Answer

The stalking horse negotiation window opens when a debtor or receiver decides to run a formal sale process and begins seeking potential buyers before filing bidding procedures. This happens 30-60 days before any public announcement. Sources who know the asset is available at this stage: debtor counsel (restructuring attorneys representing the estate), the receiver or trustee's counsel, and the broker they have engaged (if any). OffMarketX monitors court proceedings at this early stage and facilitates buyer introductions during the pre-public window.