Keys To Closing Commercial Real Estate Transactions

Anyone who thinks Closing a commercial real estateindependent third-parties necessary to the
transaction is a clean, easy, stress-free undertakingtransaction have interests adverse to, or at least
has never closed a commercial real estatedifferent from, the interests of the seller, buyer or
transaction. Expect the unexpected, and be preparedbuyer's lender. When obstacles arise, tailor-made
to deal with it.solutions are often required to accommodate the
I've been closing commercial real estate transactionsneeds of all concerned parties so the transaction can
for nearly 30 years. I grew up in the commercial realproceed to Closing. To appropriately tailor a solution,
estate business.you have to understand the issue and its impact on
My father was a "land guy". He assembled land, put inthe legitimate needs of those affected.
infrastructure and sold it for a profit. His mantra: "Buy3. Recognize And Overcome Third Party Inertia: A
by the acre, sell by the square foot." From an earlymajor source of frustration, delay and, sometimes,
age, he drilled into my head the need to "be a dealfailure of commercial real estate transactions results
maker; not a deal breaker." This was always coupledfrom what I refer to as "third-party inertia".
with the admonition: "If the deal doesn't close, noRecognize that the Closing deadlines important to
one is happy." His theory was that attorneystransaction participants are often meaningless to
sometimes "kill tough deals" simply because theyunrelated third parties whose participation and
don't want to be blamed if something goes wrong.cooperation is vital to moving the transaction
Over the years I learned that commercial real estateforward. Chief among third-party dawdlers are
Closings require much more than mere casualgovernmental agencies, but the culprit may be any
attention. Even a typically complex commercial realthird party vendor or other third party not controlled
estate Closing is a highly intense undertaking requiringby the buyer or seller. For them, the transaction is
disciplined and creative problem solving to adapt tooften "just another file" on their already cluttered
ever changing circumstances. In many cases, onlydesk.
focused and persistent attention to every detail willExperienced commercial real estate counsel is often in
result in a successful Closing. Commercial real estatethe best position to recognize inordinate delay by
Closings are, in a word, "messy".third parties and can often cajole recalcitrant third
A key point to understand is that commercial realparties into action with an appropriately timed
estate Closings do not "just happen"; they are madetelephone call. Often, experienced commercial real
to happen. There is a time-proven method forestate counsel will have developed relationships with
successfully Closing commercial real estatenecessary vendors and third parties through prior
transactions. That method requires adherence to thetransactions, and can use those established
four KEYS TO CLOSING outlined below:relationships to expedite the transaction at hand.
KEYS TO CLOSINGMost importantly, however, experienced commercial
1. Have a Plan: This sounds obvious, but it isreal estate counsel is able to recognize when undue
remarkable how many times no specific Plan fordelay is occurring and push for a timely response
Closing is developed. It is not a sufficient Plan towhen appropriate. Third party vendors are human
merely say: "I like a particular piece of property; I(they claim) and typically respond to timely appeals
want to own it." That is not a Plan. That may be afor action. It is the old cliché at work: "The
goal, but that is not a Plan.squeaky wheel gets the oil". Care must be taken,
A Plan requires a clear and detailed vision of what,however, to tactfully apply pressure only when
specifically, you want to accomplish, and how younecessary and appropriate. Repeated requests or
intend to accomplish it. For instance, if the objectivedemands for action when inappropriate to the
is to acquire a large warehouse/light manufacturingcircumstance runs the risk of alienating a necessary
facility with the intent to convert it to a mixed useparty and adding to delay instead of eliminating it.
development with first floor retail, a multi-deckOnce again, human nature at work. Experienced
parking garage and upper level condominiums orcommercial real estate counsel will often understand
apartments, the transaction Plan must include all stepswhen to apply pressure and when to lay off.
necessary to get from where you are today to4. Prepare For The Closing Frenzy: Like it or not,
where you need to be to fulfill your objective. If thecontrolled chaos leading up to Closing is the norm
intent, instead, is to demolish the building and build arather than the exception for commercial real estate
strip shopping center, the Plan will require a differenttransactions. It occurs because of the necessity of
approach. If the intent is to simply continue to userelying on independent third parties, the necessity of
the facility for warehousing and light manufacturing, aproviding certifications and showings dated in close
Plan is still required, but it may be substantially lessproximity to Closing, and because new issues often
complex.arise at or near Closing as a consequence of facts
In each case, developing the transaction Plan shouldand information discovered through the continual
begin when the transaction is first conceived andexercise of due diligence on the path toward Closing.
should focus on the requirements for successfullyWhether dealing with third-party lessees, lenders,
Closing upon conditions that will achieve the Planappraisers, local planning, zoning or taxing authorities,
objective. The Plan must guide contract negotiations,public or quasi-public utilities, project surveyors,
so that the Purchase Agreement reflects the Planenvironmental consultants, title insurance companies,
and the steps necessary for Closing and post-Closingadjoining property owners, insurance companies,
use. If Plan implementation requires particular zoningstructural engineers, state or local departments of
requirements, or creation of easements, ortransportation, or other necessary third-party
termination of party wall rights, or confirmation ofvendors or participants, it will often be the case that
structural elements of a building, or availability ofyou must wait for them to react within their own
utilities, or availability of municipal entitlements, ortime-frame to enable the Closing to proceed. The
environmental remediation and regulatory clearance,transaction is seldom as important to them as it is to
or other identifiable requirements, the Plan and thethe buyer and seller.
Purchase Agreement must address those issues andTo the casual observer, building-in additional lead-time
include those requirements as conditions to Closing.to allow for stragglers and dawdlers to act may
If it is unclear at the time of negotiating and enteringseem to be an appropriate solution. The practical
into the Purchase Agreement whether all necessaryreality, however, is that many tasks must be
conditions exists, the Plan must include a suitablecompleted within a narrow window of time just prior
period to conduct a focused and diligent investigationto Closing.
of all issues material to fulfilling the Plan. Not onlyAs much as one may wish to eliminate the last
must the Plan include a period for investigation, theminute rush in the days just before Closing, in many
investigation must actually take place with all dueinstances it is just not possible. Many documents and
diligence."showings", such as UCC searches, surveys, water
NOTE: The term is "Due Diligence"; not "do diligence".department certifications, governmental notices,
The amount of diligence required in conducting theappraisals, property inspection reports, environmental
investigation is the amount of diligence required undersite assessments, estoppel certificates, rent rolls,
the circumstances of the transaction to answer incertificates of authority, and the like, must be dated
the affirmative all questions that must be answerednear in time to the Closing, often within a few days
"yes", and to answer in the negative all questionsor weeks of Closing. If prepared and dated too far in
that must be answered "no". The transaction Plan willadvance, they become stale and meaningless and
help focus attention on what these questions are.must be redone, resulting in additional time and
[Ask for a copy of my January, 2006 article: Dueexpense.
Diligence: Checklists for Commercial Real EstateThe reality is that commercial real estate Closings
Transactions.]often involve big dollar amounts and evolving
2. Assess And Understand the Issues: Closelycircumstances. Rather than complain and stress-out
connected to the importance of having a Plan is theover the hectic pace of coordinating all Closing
importance of understanding all significant issues thatrequirements and conditions as Closing approaches,
may arise in implementing the Plan. Some issues mayyou are wise to anticipate the fast paced frenzy
represent obstacles, while others representleading up to Closing and should be prepared for it. As
opportunities. One of the greatest causes ofClosing approaches, commercial real estate counsel,
transaction failure is a lack of understanding of thereal estate brokers and necessary representatives of
issues or how to resolve them in a way that furthersthe buyer and seller should remain available and ready
the Plan.to respond to changing demands and circumstances.
Various risk shifting techniques are available andThis is not a time to go on vacation or to be on an
useful to address and mitigate transaction risks.out of town business trip. It is a time to remain
Among them is title insurance with appropriate use offocused and ready for action.
available commercial endorsements. In addressingRecognizing that pre-Closing frenzy is the norm
potential risk shifting opportunities related to realrather than an exception for commercial real estate
estate title concerns, understanding the differencetransactions may help ease tension among the
between a "real property law issue" vs. a "titleparties and their respective counsel and pave the
insurance risk issue" is critical. Experienced commercialway for a successful Closing.
real estate counsel familiar with available commercialLike it or not, this is the way it is. Prepare for the
endorsements can often overcome what sometimesClosing frenzy and be available to respond. This is the
appear to be insurmountable title obstacles throughway it works. Anyone who tells you differently is
creative draftsmanship and the assistance of aeither lying to you or has had little experience in
knowledgeable title underwriter.Closing commercial real estate transactions.
Beyond title issues, there are numerous otherSo there you have it. The four KEYS TO CLOSING a
transaction issues likely to arise as a commercial realcommercial real estate transaction.
estate transaction proceeds toward Closing. With1. Have a Plan
commercial real estate, negotiations seldom end with2. Assess And Understand the Issues
execution of the Purchase Agreement.3. Recognize And Overcome Third Party Inertia
New and unexpected issues often arise on the path4. Prepare For The Closing Frenzy
toward Closing that require creative problem-solvingApply these Keys to Closing, and your chance of
and further negotiation. Sometimes these issues arisesuccess goes up. Ignore these Keys to Closing, and
as a result of facts learned during the buyer's dueyour transaction may drift into oblivion.
diligence investigation. Other times they arise because