| Commercial real estate Sellers are funny people. Not | | | | leases, and parking leases.] |
| "ha ha" funny, but funny in the sense that they | | | | 6. A schedule of any personal property to be |
| sometimes have an odd way of looking at things. | | | | included. |
| This is not an indictment against any unique class of | | | | 7. If the property is an out-lot or otherwise part of a |
| people. Lets face it, sooner or later virtually all | | | | larger whole and is required to participate in payment |
| commercial real estate Buyers become commercial | | | | of common area maintenance (CAM) charges, copies |
| real estate Sellers. It is simply a recognition of an odd | | | | of invoices and CAM charge breakdowns for at least |
| twist that occurs in the mindset of many commercial | | | | the past 2 years. |
| real estate investors when the tables are turned and | | | | 8. Service contracts (for elevator, fire/sprinkler |
| they become Sellers instead of Buyers. | | | | maintenance, scavenger, snow removal and |
| Generally, once a Seller has made the decision to | | | | landscaping, security, etc.). |
| "sell", most Sellers want to move ahead with as little | | | | 9. Any available environmental site assessment |
| pain and delay as possible. Right? | | | | reports (Phase I and Phase 2) and, certainly, any NFR |
| What typically happens? The Seller finds a commercial | | | | letters or governmental notices relating to |
| real estate broker and lists the property. Once the | | | | environmental issues. |
| Seller receives a letter of intent or contract offer, | | | | 10. Blueprints, building plans, site plans, schematics, soil |
| the Seller contacts its attorney to prepare or review | | | | compaction test reports, structural reports, roof |
| the contract. The contract is virtually always subject | | | | warranties and other information relating to existing |
| to a "due diligence review" period during which the | | | | improvements. |
| Buyer is to investigate the property to determine | | | | To the extent practical, a Seller should compile all |
| whether it satisfies Buyer's use or investment criteria. | | | | information in its possession or control that Seller |
| The contract invariably includes a variety of "Seller | | | | would reasonably want to see if it were a Buyer |
| deliveries": a title commitment; copies of documents | | | | conducting its own due diligence review to decide |
| of record; ALTA survey; a rent roll; copies of leases; | | | | whether to purchase the property. [Ask for a copy |
| service contracts; etc. etc. etc. | | | | of my January 2006 article: Due Diligence Checklists |
| So, what does the typical Seller do? | | | | for Commercial Real Estate Transactions]. |
| Often, the Seller waits until the contract is fully | | | | If you are a REALLY bold Seller, you might even |
| executed before ordering title, obtaining copies of | | | | consider preparing and including with the Due Diligence |
| documents of record, compiling leases, ordering a | | | | Binder a bare-boned but workable form of Purchase |
| Survey, and gathering other required Seller deliveries. | | | | Agreement you would be willing to accept if |
| Worse, many Seller's adopt the attitude that: "Buyer's | | | | tendered with an acceptable purchase price from a |
| financing and due diligence is Buyer's problem - leave | | | | qualified Buyer. |
| me out of it." | | | | Of course, to be a "PERFECT SELLER", you need to |
| While it is certainly true that Buyer's financing and due | | | | understand the issues presented by the Due Diligence |
| diligence is the responsibility of the Buyer, it is also | | | | Binder's contents, especially as they relate to access, |
| true that much of the information a Buyer needs | | | | use and financing, and be prepared to work with the |
| must be obtained from the Seller. If the Buyer is | | | | Buyer to resolve problematic issues to get the |
| delayed or obstructed in obtaining necessary | | | | transaction to Closing. |
| information it will be delayed in performing its due | | | | SELLER RESISTANCE: |
| diligence review and unable to satisfy necessary | | | | Sellers are sometimes reluctant to voluntarily offer |
| conditions for financing. Even if the contract is "not | | | | this information up front. Why? There are four |
| contingent on financing", the practical reality - in most | | | | common reasons. |
| cases - is that if financing is not obtained the | | | | 1. Some Sellers think they should not volunteer |
| transaction will not Close. Failure to take reasonable | | | | anything. That maybe the Buyer will forget to ask |
| steps to facilitate Buyer's due diligence and financing, | | | | for that "one document" that reveals a defect, |
| then, ultimately becomes the "Seller's problem". | | | | thereby enabling the Seller to "get away with" selling |
| What SHOULD a Seller do? | | | | the property without addressing the issue. |
| Sellers should become proactive instead of reactive. | | | | If this is the thinking, it is naïve and short |
| Instead of waiting until a letter or intent is received | | | | sighted. What is more likely to happen is that the |
| or a contract is signed before compiling information a | | | | Buyer will discover the defect during its due diligence |
| Buyer will almost certainly need, a Seller should | | | | investigation and will either terminate the transaction |
| compile the information a Buyer will need as soon as | | | | or demand a significant price concession under the |
| the Seller decides to sell. | | | | threat of contract termination. |
| How does Seller know what the Buyer will need? | | | | On the other hand, it has been my experience that if |
| Interesting question. When the Seller was a Buyer, he | | | | the defect is disclosed at the outset, when the |
| she knew exactly what a Buyer needed to evaluate | | | | Buyer is enthusiastically formulating the project |
| the property, get financing, and Close. Still, even if | | | | concept, resolution of the issue may be factored into |
| amnesia has set in, what a Buyer needs is fairly | | | | the Buyers' development plan and never again |
| predictable. [See my article "10 Things Every Buyer | | | | become a major transaction issue. |
| Needs to Close a Commercial Real Estate Loan".] | | | | 2 Another reason I hear is that the Seller does not |
| If you are a Seller and are, indeed, committed to | | | | wish to prematurely spend the money to put the |
| selling your property, sooner or later you are going to | | | | due diligence materials together "in case transaction |
| be called upon to deliver at least the typical Seller | | | | falls apart". The Seller is concerned with "wasting |
| deliveries. Sooner is better than later. It will speed up | | | | money". |
| the due diligence process and enable the Buyer to | | | | My response to this is two-fold: i) If the Seller is |
| determine at the earliest possible date whether there | | | | committed to Selling the property, the expenditure is |
| are obstacles to Closing. | | | | not wasted even if the current transaction fails |
| Once gathered, the Seller Deliveries should be bound | | | | because most of the information will be useful when |
| in a "Due Diligence Binder" for distribution to | | | | the next Buyer comes along; and ii) the benefit of |
| interested Buyers. | | | | facilitating Buyer's due diligence and accelerating |
| It will typically expedite the transaction if the Due | | | | Closing will often far exceed the carrying cost of |
| Diligence Binder is delivered to the Buyer when the | | | | compiling this information in advance. Besides, the |
| Buyer is first seriously considering purchase of a | | | | sooner you can get to Closing, the more likely the |
| property - even before the purchase contract is | | | | transaction is to close. |
| drafted. If, in fact, conditions do exist that prevent a | | | | 3. A variation of the "money" theme is the notion |
| Buyer from proceeding to Closing, it is in Seller's | | | | that once a Buyer spends large amounts of money |
| interest to find out now rather than later so the | | | | performing due diligence the Buyer becomes |
| property can be kept on the market and made | | | | committed to the deal and is more likely to Close. |
| available to a Buyer who may be in a position to | | | | This may occasionally be true, but experience shows |
| proceed. | | | | that most Buyers will walk away rather than throw |
| Certainly, Seller may require a prospective Buyer to | | | | good money away chasing a bad deal. The result is |
| sign a Confidentiality, Non-Use and Non-Disclosure | | | | that the property may then need to go back on the |
| Agreement as a condition to receiving the Due | | | | market to start from square one. If this happens |
| Diligence Binder if the Seller feels this is desirable. | | | | more than once, the property may gain an reputation |
| If the documents are voluminous (such as if the | | | | as a "problem property", thereby depressing its value |
| property is a large shopping center, office building or | | | | in the marketplace. |
| mixed use development with many tenants), an | | | | 4. The best reason I hear (usually from other |
| alternative is the establishment of a so-called "war | | | | lawyers) is that volunteering this information risks |
| room" where copies of all the documents are | | | | exposing Seller to liability on a theory of Seller |
| maintained and can be made readily available for | | | | implicitly warranting the accuracy of the contents of |
| inspection by prospective Buyers. Even then, all title | | | | the Due Diligence Binder. |
| related documents should be compiled in a Due | | | | My response is that it only takes a little bit of |
| Diligence Binder for ready review by Buyer's attorney. | | | | creative draftsmanship to mitigate this risk. Further, |
| What should the Due Diligence Binder or war room | | | | preparing and offering a well-constructed Due |
| include? At a minimum, it should include the following: | | | | Diligence Binder documents Seller's deliveries and |
| 1. Current Commitment for Title Insurance | | | | positions the Seller to avoid most contractual |
| 2. Copies of all documents of record referred to in | | | | warranties, thereby reducing Seller's exposure to |
| the Commitment for Title Insurance which will remain | | | | liability. |
| on Schedule B of the Commitment of Title Insurance | | | | WHAT ARE THE ADVANTAGES TO SELLER? |
| after Closing (i.e. easements, restrictions, covenants, | | | | If you are a Seller of Commercial or Industrial Real |
| etc.) | | | | Estate and conscientiously follow the |
| 3. Current real estate tax bill(s) | | | | recommendations outlined above, your transaction will |
| 4. A current ALTA Survey showing all improvements | | | | proceed more smoothly and quickly, the likelihood of |
| as currently exist, ideally including items 1 through 4, | | | | Closing will increase, and you will save money by |
| 6, 7(a), 7(b)(1), 8 through 11(a) and 14 from Table A | | | | avoiding the need to renegotiate issues that should |
| of the Optional Survey Requirements for ALTA | | | | have been addressed at the outset of the |
| Surveys. | | | | transaction. |
| 5. If the property is income producing, operating | | | | To be sure, other issues will arise. They always do. |
| statements for the past 3 years, a Rent Roll and | | | | But your chances of proceeding to Closing on-time |
| copies of all leases, licenses and concessions. [Don't | | | | and on-budget will greatly increase if you make the |
| forget about cell-tower leases and billboard or sign | | | | effort to be as close to a Perfect Seller as possible. |