Sellers of commercial real estate generally loathe dealing with flippers.  What constitutes a flip?  A flip occurs when the “original buyer” enters into a purchase contract and then assigns the purchase agreement to the “ultimate buyer” prior to the closing.  First, the original buyer/flipper, if successful, makes a profit that the seller believes they should be pocketing.  Second, if the flipper cannot close the transaction on its own, a higher probability exists that the sale will not close at all, resulting in a waste of seller’s time, resources and money. This article examines ways in which a seller can defend against its property being tied up by a flipper.

In order for a buyer to profit from flipping by assignment, the flipper must be able to assign the purchase agreement to the ultimate buyer. The right for an original buyer to assign the purchase agreement is not inherently harmful to a seller.  In fact, prior to the closing, most original buyers (who are not flipping) assign the purchase agreement to a new entity formed by the original buyer solely for the purpose of acquiring and owning the property.  Such newly formed entities are often created to shield other assets from risk or to satisfy a lender’s requirements for the property to be owned by a single purpose/single asset entity.

Crafting a Protective Assignment Provision for Sellers

A well-crafted assignment provision allows the original buyer to assign the purchase agreement to a new entity formed by the original buyer solely for the purpose of acquiring and owning the property, and prohibits the original buyer from flipping the purchase agreement to an unrelated third party for a profit.

In order to protect against the flip, Sellers should craft an assignment provision in the purchase agreement that:

1. Permits assignments by the original buyer to an entity owned and controlled by the original buyer (or, if the original buyer is an entity, to an entity owned and controlled by the owners of the original buyer).

2.     Prohibits assignments by the original buyer to an entity not owned and controlled by the original buyer (or, if the original buyer is an entity, to an entity not owned and controlled by the owners of the original buyer).

3.     Prohibits, if the original buyer is an entity, the transfer of ownership interests in the original buyer as a subterfuge to avoid the restriction provisions described in paragraph 2, above.

4.     Prohibits the original buyer from entering into an agreement to sell the property prior to the closing.

It is wise for a seller to start negotiations with a strong “anti-flipping” assignment provision.  If the assignment restrictions are objectionable to the original buyer, the seller can quickly flesh out the original buyer’s true intentions regarding the acquisition.  Also, as with all negotiations, the parties can always agree to modify the “starting” assignment provisions in a manner that makes sense for the transaction.

If you have any questions or comments, email Rick.

Disclaimer: This article is provided by Angel Law Offices for general education purposes only.  The information should not be relied on as legal advice, nor does it serve to create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.

When acquiring commercial real estate, it is important to conduct due diligence to ensure there are no surprises that will affect the value or use of the property.  One aspect of the due diligence process is considering obtaining an ALTA Survey.  The two main reasons for obtaining an ALTA Survey are (i) to satisfy the title insurer’s requirements for the issuance of ALTA title insurance coverage for Survey Risks (defined below), and (ii) to specifically locate both record and non-record matters that affect the property, which can be critical for evaluating whether or on what terms to proceed with an acquisition.  This is particularly important when the preliminary title report raises many or difficult-to-locate easements or other similar exceptions, or when the facts on the ground seem complicated.

An ALTA Survey is a survey prepared by a licensed surveyor in accordance with detailed standards adopted by the American Land Title Association (ALTA) and the American Congress of Surveying and Mapping (ACSM).  An ALTA Survey maps the property’s boundaries, the location of the improvements on the property, including buildings and other structures, fences, utility lines and installations, trails, paths and roads, etc., and the location of all access, utility and other easements recorded against the property.

For commercial real estate, title companies typically require an ALTA Survey before they will commit to issue title insurance covering the following “Survey Risks:”  (1) encroachments, boundary line disputes, or other matters or circumstances that would be disclosed by an accurate survey and inspection of the property; and (2) easements or claims of easements not shown by the public records.  In some states, and for certain property types, a less detailed (and less expensive) form of survey, or an improvement location certificate, may suffice to obtain title insurance coverage for Survey Risks.

When to conduct an ALTA survey?

An ALTA survey will identify and locate:

• Buildings, fences or other improvements from neighboring properties that encroach onto the property being acquired;
• Buildings, fences or other improvements located on the property being acquired that encroach onto neighboring properties;
• Buildings, fences and other improvements located on the property being acquired that encroach onto existing easements (utility, access, etc.) located on the property being acquired;
• Existing record easements that might have an adverse impact on the use or future (re)development of the property being acquired; and
• Potential easements or claims of easements not disclosed in public records but indicated by facts on the ground that might adversely impact the property being acquired.

An ALTA Survey is not legally required and is not always necessary. It is important to balance the potential risks against the expense of due diligence. For example, if you are acquiring a 30-year-old apartment building in a well-developed urban area, a visual inspection does not raise any concerns about potential boundary disputes or encroachments, and the preliminary title report does not disclose any easements or other record matters of concern, you might feel comfortable forgoing an ALTA Survey and title insurance coverage for Survey Risks. In some cases, you may be able to convince your title insurer to provide coverage for Survey Risks based on a less expensive form of survey or on an improvement location certificate. In general, how detailed and how expensive a survey you need is a question best answered after a site inspection and review of the preliminary title report.

If you have any questions or comments, email Rick.

Disclaimer: This article is provided by Angel Law Offices for general education purposes only.  The information should not be relied on as legal advice, nor does it serve to create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.

When you buy a used car, you look under the hood and kick the tires. If you buy a jalopy at a great price, you tolerate more defects than if you buy an expensive performance vehicle at market price. The point is, you investigate and confirm the desirability and value of what you buy.  This is the due diligence process in a nutshell. The only difference between due diligence for commercial real estate transactions and for a car is what information you evaluate.

Since most commercial property sales are done on an “as-is” basis (with minimal or no representations and warranties), conducting proper due diligence is especially important to buyers.  Although there are many elements of the due diligence process, including obtaining new third-party inspection reports and a title report, the attached due diligence checklist focuses on information that buyers attempt to obtain from sellers.

Due diligence is a key part of acquiring commercial real estate.  For buyers, the due diligence process is a time consuming and costly process.  But, it is necessary to uncover facts and circumstances that may impact the value of the property being acquired.  It may also lead the buyer to the conclusion that they are either getting a great deal, should renegotiate the purchase price or back out of the deal altogether.  Sellers can anticipate the requests buyers will make during the due diligence and take preparatory steps to expedite the sale of commercial real estate, including organizing and preparing due diligence documents for buyers in advance of placing the property on the market.

See below for a detailed, though not fully comprehensive, list of documents for a buyer to request a seller.

DUE DILIGENCE DOCUMENT CHECKLIST

Depending upon the information available to the seller, the buyer’s list may be winnowed down by the seller during negotiations.  This process, in itself, may provide the buyer with insight into unquantifiable risks or costs that will be incurred to obtain the information.

Tenant Information

• Rent roll showing, for each tenant:
  1. Tenant’s name, suite number, size of premises.
  2. Rent, scheduled rental increases, percentage rent.
  3. Term commencement and expiration dates, options to extend.
  4. Options and rights of refusal to expand or contract the premises or to terminate the lease.
  5. Common area expense pro rata share, base year and base year expenses, if applicable, caps.
  6. Security deposit.
  7. Guarantors, if any.
  8. Concessions made to tenants, including free or reduced rent, above standard tenant improvements, cash payments, moving allowances, or takeover of previous lease obligations.
  9. Nature of tenant’s business and use, including exclusive use rights, if any.
  10. A schedule of any tenant improvement work Seller is obligated to complete but has not yet completed and capital improvement work either scheduled or in process on the date of this purchase agreement.
• Current and historic vacancy rates.
• A copy of all leases (including all exhibits and attachments) and amendments, including guarantees and subleases.
• A copy of or access to review the tenants’ files maintained by the seller.
• Most recent financial statements and credit information and reports, if any, for all tenants and guarantors.
• Current and historic payment reports for each tenant.
• Any executed letters of intent with prospective tenants.
• Most recent leasing status report from leasing broker.
• Standard form lease.

Operating Information

• Financial statements of the property for the past three years and year-to-date for the current calendar year.
• Current operating and capital expense budgets of the property, including comparison of actual to budgeted results and an explanation of significant variances.
• Listing of capital expenditures for the property for the prior years.
• Copies of all service, maintenance, leasing, management, or other contracts, and all other agreements, warranties, and guaranties relating to the operation, use, management, or maintenance of the property.
• Copies of real estate tax bills (including special assessments) for the prior three (3) years, including evidence of payment of each.
• Utility bills for the last two years.
• Aged receivables report through the date for the prior twenty-four (24) months.
• Copies of all owner’s insurance policies now in effect with respect to the property, including owner disclosure affidavits, insurance inspector’s risk assessment reports and copies of any claims under such policies, and evidence in Seller’s possession that tenants are maintaining the insurance coverages required under their leases.
• List of employees, if applicable, including name, position, wage and benefits.

Building Information (Plans and Reports)

• Mechanical reports, including HVAC.
• Roof reports.
• Environmental reports, including soils tests, radon, mold, lead paint and asbestos reports.
• Geotechnical soils reports.
• Seismic risk assessment (probable maximum loss) reports.
• Plans and specifications showing “as built” condition of the property.
• Reports showing compliance with Americans with Disabilities Act (ADA) requirements.
• Architect’s certificate or studies certifying the square footage of the building.

Miscellaneous

• All licenses, permits, and approvals for the property, including, without limitation, certificates of occupancy for the building and for each tenant.
• Most recent boundary and/or title survey.
• Seller’s policy of title insurance for the property.
• A copy of existing loan documents if the loan(s) are being assumed.
• Copies of any notices of violations of or verifications of compliance with any federal, state, municipal, or other health, fire, building, zoning, safety, environmental protection, or other applicable codes, laws, rules, regulations, or ordinances relating or applying to the property.
• List of all pending and historic litigation against the property, against Seller, or any general partner of the Seller that relates to the property.
• For larger properties, trademarks, brochures and websites if such intellectual property is to be transferred.
• A list of all furniture, fixtures, equipment and supplies attached to, located in, our used in connection with the operation of the property which will be conveyed to the buyer.

If you have any questions or comments, email Rick.

Disclaimer: This article is provided by Angel Law Offices for general education purposes only.  The information should not be relied on as legal advice, nor does it serve to create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.

You own real estate and sign a letter of intent that contains the material deal points for your transaction.  At the end of the letter, it clearly states: “Unless a formal agreement is entered into within 30 days of the date of this letter, this letter of intent shall be non-binding and of no further force or effect.”  Sounds clear enough. But be careful, you can be bound by a letter of intent, even if it states it is non-binding.

The two primary factors used by courts to determine if a letter of intent is binding are:

• INTENT, as expressed in the letter of intent, and
• ACTIONS, taken after the letter of intent is signed.

Below are five simple steps you can take, and a sample non-binding clause, to help ensure that your letter of intent will remain non-binding.

1.   Do not imply the existence of a binding agreement.

Avoid using language that can be interpreted as creating a binding agreement. Language included in a letter of intent such as “agree,” “offer,” “acceptance,” or “offer will be null and void if not accepted by 5:00 p.m. on xx/xx/xxxx” may be interpreted as an agreement by the parties to be bound by terms of the letter of intent. Since a time deadline may motivate a prompt response, consider adding a time deadline that does not imply the existence of a contract, such as “your response is required prior to 5:00 p.m. on xx/xx/xxxx.”

2.   Terminate negotiations in your sole and absolute discretion.

Parties realize that letters of intent are not binding.  Accordingly, include language in your letter of intent that affirms it is not binding and that negotiations may be terminated at any time by either party in their sole discretion.

3.   Do not agree to negotiate in good faith.

Although this may be counterintuitive to the spirit of moving a deal forward, it is never abundantly clear what “good faith” means or how you can inadvertently breach this covenant.  Accordingly, it is a good idea not to include “good faith” language in a letter of intent.

4.   Confirm that an agreement has not been reached.

While moving a transaction along prior to signing a binding agreement, confirm with each communication that an agreement will not be reached until a definitive written agreement is executed by the parties.

Laws have been enacted that permit written agreements to be executed electronically. Electronic signature services such as DocuSign are now commonly used to execute and deliver documents, but be aware that an email that indicates your agreement can also create a binding contract.  So, to avoid the inadvertent creation of a binding contract, be sure reiterate in your emails that an agreement will not be reached until a definitive written agreement is executed by the parties.

5.   Have strong non-binding language in your letter of intent.

Whether a letter of intent is interpreted as a binding agreement is a question of the parties’ intent as expressed in the letter of intent and through their actions after the letter of intent is signed.

There is no better way to express your intent than having a strong non-binding clause in your letter of intent.

Here is a sample provision:

This letter, though not binding, is intended to serve as the basis for negotiating a final written agreement which will contain material terms not mentioned in this letter. This letter does not create an exclusive right to negotiate or an obligation to negotiate in good faith. Either party may terminate negotiations at any time in their sole discretion.  Partial performance by either party of the terms of this letter, or the efforts by either party to perform due diligence or carry out other acts in contemplation of consummating this transaction, shall not be deemed evidence of intent by either party to be bound by the terms of this letter. The subsequent approval or acknowledgement of an agreement by email, text, or any other electronic communication service shall not be binding upon either party. The parties will not be bound to an agreement unless and until they review, approve, execute and deliver a final and definitive written agreement.

A Letter of Intent is an important first step in most real estate transactions.  With little cost or time delay, the parties can use a letter of intent to reach agreement on the primary deal points for a transaction.  However, as outlined above, you must proceed with caution to avoid having your letter of intent inadvertently converted into a binding agreement.

If you have any questions or comments, email Rick.

Disclaimer:  This article is provided by Angel Law Offices for general education purposes only.  The information should not be relied on as legal advice, nor does it serve to create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.