Acquiring or Developing a Commercial Property is a Complex Process that Requires Legal Assistance
Many purchasers don’t understand the complex multi-step process conducted behind the scenes of a transaction. Extensive amounts of time and research go into ensuring the property is suitable for purchase. Don’t drop the ball on your purchase, and let a real estate attorney provide the due diligence and preparation that you need.
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The Process for the Acquisition & Development of Commercial Property
Commercial Property Acquisition Timeline
Acquiring and developing commercial property is a multi-step process that extends beyond simply identifying a property and negotiating a purchase price. In a commercial real estate transaction, investors and developers must conduct also conduct extensive amounts of due diligence related to the property’s physical attributes and economical status prior to the final closing of the sale. During this time a real estate attorney can help guide you through the initial negotiations all the way until closing administration. Having a real estate attorney by your side can ensure a smooth process with no unintended legal consequences.
Letters of Intent
Letters of intent are typically the first step in a commercial transaction where a real estate lawyer will play a role. Letters of intent are designed to be non-binding agreements that detail the terms of a transaction and the commitment of the parties to move forward. Letters of intent typically include most, if not all, of the relevant terms to a transaction such as the purchase price, identity of the property, terms of the closing, any contingencies, and a timeline for the transaction. Letters of intent are signed by both the purchase and seller, so it is important to make sure there is no enforceable agreement until and unless a formal purchase and sale agreement is executed by both the purchaser and the seller.
While letters of intent are non-binding, the parties may consider including two provisions that can be contractually binding: confidentiality/non-disclosure and exclusivity. Both the purchaser and the seller may wish to keep the terms, and even the fact of their negotiations, confidential and they may accomplish this by including such a confidentiality clause within the letter of intent. Additionally, the purchaser may also wish to have a period of time in which the seller agrees to not actively market the property to third parties or in which not to enter into a purchase and sale agreement with a third party. In both instances, the language must be clear that these provisions, unlike the remainder of the letter, are binding and enforceable, and they must be supported by adequate consideration.
Following the execution of a letter of intent, the parties will quickly move towards the drafting of a purchase and sale agreement to be further negotiated by the parties.
Purchase and Sale Agreements
A real estate purchase and sale agreement is a contract between a buyer and seller of real property, in which the buyer proposes the terms and conditions for the proposed sale. A real estate purchase agreement details the frame of the rights, responsibilities, and obligations for each party before the legal transfer of title can occur. At a minimum, purchase and sale agreements should include the following information related to the transaction:
• A legal description of the property;
• The purchase price;
• Amount and timing of payment for earnest money deposits;
• Due diligence documents required to be provided;
• Due diligence review period;
• Casualty and condemnation clauses;
• Representation and warranties;
• Breaches and remedies;
• Applicable law; and
• The time and place of closing.
The parties will engage in negotiations until the real estate purchase and sale agreement is fully executed by both of the parties. Following full execution, the purchaser will begin its due diligence to confirm that the property is suitable for the purchaser to move forward with the sale.
Due Diligence Review
Purchase and sale agreements for commercial real estate commonly include a period for the purchaser to conduct its due diligence investigation of the property before the purchaser is obligated to purchase the property. All well advised purchasers will conduct a certain level of due diligence before moving forward in a transaction. The nature and extent of the purchaser’s due diligence will vary depending on the size, type, and complexity of the property being acquired.
The purchaser’s inspection activity during the due diligence period is initiated with the seller’s delivery of the existing information regarding the property. This information could include existing title policies, surveys, environmental assessments, appraisals, leases, property financial, lists of personal property located on the property, and any contracts and warranties relating to the property. The purchase and sale agreement should specifically identify all existing due diligence items the purchaser requests and identify a timeline to produce such documents. A seller should limit its production to documents in its possession, and because this information may contain confidential information, the seller should also require that the purchase not disclose any such information.
Regardless of the type of property or complexity of the transaction, the purchaser’s due diligence investigation will typically include a physical and environmental inspection of the property; title and survey review; zoning review; review of any leases and other assignable agreements; and a review of the financial information relating to the property. Typically, if a purchaser decides prior to the expiration of the due diligence period that the purchaser is not satisfied with its due diligence review, then the purchaser can typically terminate the agreement and receive a return of the earnest money deposit.
The final step in a real estate transaction is the closing of the transaction contemplated by the real estate purchase and sale agreement. Having an attorney assist at this stage is critical as the closing attorney will create lines of communication between both parties as well as the lenders, title company, brokers, and other third-party professionals related to the transaction. The real estate attorney must take the lead on the coordination of all of these parties to ensure that the closing of the transaction occurs smoothly and on time.
Leading up to the closing, the real estate attorney will assist with drafting certain documents necessary to complete the transaction as well as assist the purchaser review any loan documents. The attorney will also ensure that the title policy to be delivered by the title company is in a form acceptable to the purchaser as well as review the final settlement statement related to the transaction. The engagement of a real estate attorney is crucial to ensure that your real estate transaction occurs smoothly with no unforeseen legal consequences.
For legal assistance with any residential or commercial real estate acquisition or development, contact Neiman Law LLC today.