As experienced Columbus commercial real estate attorneys, we deal with investors who are just beginning their portfolio of investment properties and investors who have already established such a portfolio. While we know that a good commercial real estate attorney can significantly protect his or her client against risks and can structure a transaction in a manner to accomplish his or her client’s goals, we have encountered both new and seasoned real estate investors who do not know what a commercial real estate attorney does.
The tasks of a commercial real estate attorney are vast. However, below we have summarized a few key areas in which a commercial real estate attorney can benefit his or her client’s transactions. The below list is by no means an exhaustive list of the ways a commercial real estate attorney can benefit his or her client’s transactions.
An extremely important document in any commercial real estate transaction is the purchase agreement. The purchase agreement is considered to be the “road map of the deal” because it determines what, when and how actions related to the transaction are to occur. Regardless of whether we are representing a seller or a buyer of commercial real estate, we always recommend that we prepare the first version of the purchase agreement in order to help our client to take control of the deal from its onset.
Before drafting the purchase agreement for a buyer, we can first conduct our own initial due diligence of the real property to be purchased. Such due diligence includes but is not limited to researching the respective databases of different county and state offices to confirm that the purported seller owns the real property to be purchased and that the purported seller, if an entity, is in good standing with the state in which it is registered. Conducting such due diligence before entering into a purchase agreement can reveal problems with a deal before the purchase agreement is signed thereby saving investors time and money.
The majority of commercial real estate purchase agreements contain one or more provisions detailing the purchaser’s timeframe to conduct due diligence. These are extremely important provisions that should be well thought out by the purchaser as each purchaser’s method of conducting due diligence can differ. Purchasers of commercial real estate may want to examine a variety of things including, but not limited to, the physical condition of the building or the real estate, financials, any previously issued title policies and any survey or other items purchasers deem important to examine before purchasing the real estate. A good commercial real estate attorney will understand his or her client’s procedures and goals as they relate to the due diligence period and will draft due diligence provisions that match his or her client’s goals.
Sometimes investors execute a letter of intent with the other party to the transaction before entering into a purchase agreement. A letter of intent typically contains some of the material or significant terms of the transaction which the parties can agree upon before the purchase agreement is drafted including, but not limited to, purchase price, inspection period and closing date. The negotiation and execution of a letter of intent can expedite the preparation and finalization of the purchase agreement. A letter of intent should be, just that, an intent, and not a binding contract. It is important to consider what you are stating in the letter of intent and it is always wise to have your commercial real estate attorney review or draft the letter of intent before you sign it.
Asset and Liability Protection
Most investments carry a certain amount of risk and an investment in commercial real estate is no different. There is a wide range of risks associated with investing in commercial real estate including, but not limited to, risks associated with bodily injuries occurring on the real estate, risks associated with disputes with third parties or vendors and risks associated with disputes with lenders or investors.
These risks and others can result in litigation being brought against the owner of the commercial real estate. When litigation is brought against an owner of commercial real estate, the owner’s assets could be in jeopardy if the litigation ends with an unfavorable judgment against the owner. A commercial real estate attorney can protect his or her client and their investments from the risk of litigation stemming from the ownership of commercial real estate. Such protection can be achieved with the formation of one or more entities to be owned by the client with such entity(ies) being the actual owners of the commercial real estate. Choosing the right structure and type of entity depends on a variety of factors including, but not limited to, the number of people comprising the entity, the presence of investors in the entity with limited authority to make decisions on behalf of the entity and the tax consequences resulting to the owner(s) of the entity. Your commercial real estate attorney would work with your accountant, who knows the particulars of your financial and tax situations, to decide which structure and type of entity shall own your commercial real estate investments.
Title and Survey
An extremely important and often overlooked area of due diligence relates to the process of insuring the title to the commercial real estate you are buying. The “title to the real estate” is the bundle of rights granted to the owner of a piece of real estate upon the owner’s acquisition of the real estate. As with any bundle of rights, you must protect the title to your real estate from defects or anything that may infringe upon or negatively affect it. Some defects to the title of your real estate can prevent you from selling the real estate, using it for your intended purpose, using the real estate as collateral for loans, and can cause litigation to be commenced against you as the owner of the real estate.
An effective way to help protect the title to your real estate from such risks or defects is to insure it. However, you cannot simply call your hazard insurance agent to obtain an insurance policy for the title to your real estate. You must use a title insurance agent in order to obtain a policy for title insurance, which is typically obtained at closing. As with any type of insurance, the insurer must assess the risk associated with what it is insuring. The title insurance agents start the process of evaluating such risk by ordering a search of instruments recorded at the respective county recorder’s office that affect the title to your real estate. This is often referred to as a title search.
Once the title search is completed, the title insurance agent will determine from the results of the title search what aspects of the title it will or will not commit to insure at closing. This commitment to insure the title is often referred to as the title commitment. Typically, the title insurance agent will not want to insure every aspect of the title to the real estate and will likely include exceptions to the coverage it is committing to provide in the title commitment. A good commercial real estate attorney will not only evaluate the strength of the title insurance the title insurance agent is committing to provide at closing but will also review the title commitment for other items including, but not limited to, correct legal descriptions and presence of certain requirements. After such review takes place, a good commercial real estate attorney may object to the title commitment and require the seller to remediate encumbrances or other defects to the title of the real estate before counseling his or her client to acquire real estate. A good commercial real estate attorney may seek a commitment from the title company to provide endorsements to the title policy to further protect the buyer.
A good commercial real estate attorney will likely counsel his or her client to obtain some sort of survey to depict various items affecting the title to the real estate including, but not limited to, encroachments and encumbrances. An encroachment may occur when a property owner violates an adjoining property owner’s rights by building or extending a structure onto that adjoining property owner’s property. A common encroachment is a building or a fence encroachment. A survey may show where certain buildings or fences encroach over the property line and it may show where certain easements apply to the property. It is extremely beneficial for an investor to know where encroachments and encumbrances lie on the real estate to be purchased as their location may affect the soon-to-be-owner’s plans for the real estate.
In most transactions, it is common for a lender to be involved in the purchase of commercial real estate. In many instances the amount being borrowed is a significant encumbrance on the real property and therefore it is very important to have an experienced real estate attorney review the initial term sheet and subsequent documents drafted by the lender in order to protect the buyer’s interests as much as possible. The earlier the attorney is involved with the lender the better. If the attorney is involved in the finalization of the initial loan commitment with the lender, it will raise the ability to negotiate the requirements of the lender to more reasonable or less expensive alternatives. Documents from the lender may include a note, mortgage, assignment of rents and leases, assignment of service contracts and a personal guaranty. An experienced real estate attorney will recognize common pitfalls found in the documents drafted by the lender and will be able to assist the buyer in understanding the documents as well as may be able to negotiate more favorable terms and conditions. If the buyer is an entity such as a Limited Liability Company then the lender may also require an opinion letter from an attorney as well as other documents such as incumbency certificates and resolutions.
The final step in a commercial real estate transaction is the closing of the deal. The “closing date” typically refers to the date in which the real estate will be transferred to the buyer. Much of the work a commercial real estate attorney puts in while his or her client is in contract to acquire or sell commercial real estate is to ensure the closing of the deal goes smoothly. Some of the duties a commercial real estate attorney will fulfill at closing include but are not limited to reviewing the deed and other closing documents from the title company, reviewing the settlement statement or closing statement to ensure funds are to be received and disbursed by the title company in conformity with the terms of the purchase agreement, preparing various documents assigning rights under various contracts or leases to the other party and preparing a closing instructions letter mandating that the title company follow the commercial real estate attorney’s instructions as to how to close the deal. A good commercial real estate attorney will typically counsel his or her client to obtain a closing protection letter from the title company to protect his or her client’s funds from fraud or other misuse.
While there are investors who have made it to the closing table successfully without a good commercial real estate attorney, some of those investors have had to deal with problems after closing that a good commercial real estate attorney could have brought to the investor’s attention before closing. Finding these problems before closing can permit an investor to begin to take steps to mitigate the damage resulting from the problem or can permit an investor to kill the deal if the investor deems that to be the right business decision. Consequently, it is always advisable that an investor with any level of expertise hire a good commercial real estate attorney to represent the investor in his or her deals.