Unit 3: Commercial Purchase & Sale Flashcards
How commercial purchasers give a down payment
- Same way we learned in residential purchase & sale–put it in seller attorney’s escrow with a check or wire
- Letter of credit–document from a bank, the bank is called an issuer, the document is called an Irrevocable Standby Letter of Credit. Look at this the same way look at cash in the bank, without releasing money in the “bank account.” Letter of Credit creates collateral
Commercial due diligence
Business: Money, physical
Legal due diligence
Seller must turn over all documents and provide access to property to Buyer. Reason why we have to sign contract and give down payment is because there’s no way the Seller would release this confidential info unless there was good faith on the Buyer’s part that they’re actually serious about a potential purchase
Data Room/War Room
All documents are put into war rooms online. Purchaser’s counsel would use a password to read every single one of these documents.
Legal due diligence on leases
Rent roll (shows tenants, how much they pay, when leases expire, security deposits)
Terms for terminating a lease agreement
Right of first refusal
Rights & obligations of both parties
Why a purchaser client would want to turn down the offer
They found something better (ex: similar but way cheaper)
There’s something wrong with a fundamental aspect of the building, like fire safety, emergency exits, windows don’t seal
Bad energy efficiency ratings
Environmental reports indicate environmental hazards
What is meant by “prewar”?
A building built before WWII
Many buildings built prewar that used asbestos for insulation. Is asbestos an environmental hazard? Yes and no. Reality is, as long as it’s not “fryable” (can’t get into the air) it’s not an immediate concern. It is still a concern though, because it can still be in places where it can harm people.
Unpermitted encumbrances
Mortgage, lien, lawsuit, court judgment against seller
What should be done with tenants who don’t pay rent on time mid-sale?
Give it back to the seller when it gets paid. Hold what’s due to seller in trust. P&S agreement says to give it to the seller.
What should be done with deadbeat tenants?
Seller can go to court to claim the rent, but they can assign this right to the buyer. (People don’t typically do this though.)
They can also send them one month’s rent, purchaser then looks at that one month rent as payment for the month of May. Only after deadbeat tenants bring themselves up to date on their arrears that someone will then send the rents to the seller and buyer is obligated to send because it survives the closing of the transaction to the seller
What are the best types of deeds?
Bargain & sale deed or a warranty deed with a covenant against grantor’s acts (meaning: seller hasn’t done anything to encumber the title of the property)
Deed
Proves buyer owns property.
Deed can only be released by going to the county clerk’s office if payment gets wired into the title company’s account.
Can you ever bring bank checks to a commercial transaction?
No.
How is closing defined in commercial purchase & sale?
The title company initiates the wire to go to the seller, and then seller gives authorization to release documents. Then we have closing.
Estoppel Certificate
Estoppel certificate = buyer takes title to property relying on this representation of how much money is due. EC is updated a week or two before closing. Also helps make sure there’s no defaults on the landlord’s part, ensures security deposits, rents, etc. are at the proper amount
Indemnification
Compensation for harm or loss.
Requires a buyer to have insurance.
Local Law 11
Buildings that have bricks or other small pieces attached to the facade need to do some maintenance every 5 years, due to the risk of bricks falling and killing people.
Zoning report
Date of existing ordinance, existing zoning designation, adjacent zoning designation
Municipality provides for nonconforming-with-zoning-laws use
Where does the Letter of Intent come from in Commercial Purchase & Sale?
Typically come from the buyer to the seller. In leasing, it comes from both sides.
Usable vs. Rentable Square Feet
Usable = how much you can use
Rentable = the amount that the rent is based on (ex: stairways, lobbies, amenities, etc.) Picked according to landlord’s whim.
Landlord always charges rent on a rentable square foot basis.
As is
Space is given to buyer exactly as it was before the sale.
Plain vanilla box
Landlord demolishes the entire premises and gives the skeleton to the buyer.
Full build-out
The state of delivery that many tenants want. The landlord customizes the premises according to your specifications.
Restriction on Use of Properties
If you want to rent the space for a certain purpose, ex: opening a burger place, landlord will want you to use the space for that and nothing else. Landlords like restricting the uses of their properties.
If you will assign your lease to another party, sublet a portion of the premises, unless they do the same permitted use as you, they can’t do it
As the tenant, however, you want a broad permitted use. Ex: If you want a burger place, you would also want to say “restaurant” over “burger place” as the restriction on use because restaurant is broader than burger place
Tenants also want 24/7 access, but landlord doesn’t want tenants to have 24/7 access because that would make cost of operating higher
Base Year
First year of occupancy; pay basic rent.
Fiscal Year in New York
Use fiscal year for real estate taxes (July 1 - June 30), but for operating expenses, use Jan 1 - December 30. The lease will have these two separate base years. The first year the tenant doesn’t have to pay toward these things.
Then the landlord might only charge the tenant their percentage/proportionate share of any increases over the base year.
Exceptions to Executive Compensation
Executive compensation (compensation for the landlord) shouldn’t be part of operating expenses.
Exception to Special Cleaning
Excludes cost of cleaning for all special cleaning expenses outside yours.
Purposes of an Audit
Purchaser should have right to audit.
Make sure landlord is sticking to agreed upon exclusions from your rent
Look at how much tenants are paying
