Commercial real estate acquisitions are often complex transactions that involve multiple parties, negotiations, and a variety of legal, tax, and financial considerations. Navigating the acquisition process can be challenging without a clear understanding of some key factors involved in a deal. In this blog, we’ll highlight nine essential considerations to keep in mind in a commercial real estate acquisition.
Purchase price
Many factors influence the purchase price of real property, including, value from an appraisal, the current market, how long the property has been on the market, location, if there are a number of interested buyers, and property condition, to name a few. Additionally, the needs of the buyer and the seller also play a role in determining the purchase price and the type of transaction (i.e., a tax-deferred exchange).
Payment of the purchase price
Beyond the purchase price itself, parties need to determine the manner and timing of payment. This will include determining potential third-party financing or seller provided financing, interest rates and terms, tax considerations for both parties, and documentation of any agreements related to loans, repayment and/or necessary guarantees.
Deposit(s)
The earnest money deposit(s) will depend on the purchase price and a variety of other factors. Parties will also need to determine the terms of the deposit(s), including, determining whether a deposit is non-refundable, time frame or policies for refunds, what circumstances cause the buyer to forfeit a deposit, and whether a deposit will be applied to the purchase price at closing. There may be multiple deposits that are used as the buyer reviews and is satisfied with specific due diligence items.
Review/Inspection period
The review and inspection period refers to the time the buyer has to conduct due diligence, and the specific terms of the due diligence the buyer will conduct. These need to be agreed upon by the parties. For example, the inspection and review periods needs to be long enough for a buyer to complete their due diligence but short enough for the seller to not lose out on other potential buyers because the property was off the market for too long. A buyer may want to look at title issues, permits and zoning, survey and boundaries, environmental conditions, architectural issues and the overall condition of the property. Parties also need to decide if and how the seller plans to cure any issues the buyer finds during their due diligence.
Taxes
The parties should discuss the tax consequences of the sale and what type of transaction would be beneficial to both buyer and seller. Are there local transfer taxes? Who will pay for these? Both parties should consult independently with their financial, tax and legal advisors before conferring with the other party to ensure a smooth and beneficial transaction for all. If the seller is contemplating a 1031 exchange after the sale, this should be discussed with the buyer to confirm the buyer will cooperate with such efforts.
Paperwork and documentation
Consider which form of deed the seller will use to transfer good title to the buyer (i.e., special or general warranty deed) and what effect it will have on seller warranties and buyer recourse. The buyer may want to have a survey done to obtain important information on the property’s metes and bounds. Buyer will also want to have detailed title work done and a title commitment issued from a reputable title company to confirm and review any recorded encumbrances on the property. Ensure that all parties have accurate and updated documents related to the standing of the property. Are there any third-party contracts affecting the property like leases or licenses? A buyer will also want to review these contracts and may want tenant estoppels signed. Are there any HOA’s or other commitments with neighboring properties?
Zoning, access, and use
During the inspection and review period, the buyer should review the property’s zoning status, permits, special districts, and compliance with local regulations to determine if their intended use for the real estate is compatible with these items. Additionally, buyers should consider access to the property and whether any easements may be necessary or if any existing easements may get in the way of their plans. These types of considerations are crucial as they may add additional costs and time to an acquisition.
Licenses and permits
If the buyer needs to obtain licenses or permits to develop the property, seller may need to agree to cooperate, at the cost of the buyer. Additional time may be needed to get conditional approvals from state and local authorities related to the buyer’s development plans.
Contract default provisions
A contract for a commercial real estate acquisition should include a provision that details the remedies available to each party if the other defaults (i.e., specific performance, damages, return of the deposit, limitations on liability, etc.). The contract should also include provisions related to confidentiality, any potential right to assign interest, representations and warranties made by the seller, and the effect of any damage or improvement to the property before closing.
(MLMW, is a boutique real estate, business, employment, and litigation law firm in Denver, Colorado. The attorneys at MLMW regularly represent clients on both sides commercial real estate acquisitions.)
