Due Diligence in Commercial Real Estate...

Presenting a live 90‐minute webinar with interactive Q&A

Due Diligence in Commercial Due Diligence in Commercial Real Estate PurchasesIdentifying and Mitigating Risks and Liabilities Before the Closing

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, DECEMBER 13, 2011

Today s faculty features:

Larry N. Woodard, Shareholder, Robbins Salomon & Patt, Chicago

Paul J. Johnson, Partner, Shannon Gracey, Arlington, Texas

Robert K. Casey, Attorney at Law, Carlsbad, Calif.

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Due Diligence in Due Diligence in Commercial Real Estate PurchasesCommercial Real Estate Purchases

Tuesday, December 13, 2011y, ,

Larry N. WoodardROBBINS SALOMON & PATT LTDROBBINS SALOMON & PATT, LTD.25 E. Washington St., 10th FloorChicago, Illinois 60602(312) [email protected]

Due DiligenceDue Diligence——A Working DefinitionA Working DefinitionDue DiligenceDue Diligence A Working DefinitionA Working Definition

A standard of conduct for investigating allA standard of conduct for investigating all material facts and requirements for the transaction to work.transaction to work.

Exercise all diligence that is due under the circumstances to confirm viability of the Transaction Planto confirm viability of the Transaction Plan.

Caveat emptor: Assume there will be no precourse against Seller after closing.

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Due Diligence Threshold QuestionsDue Diligence Threshold QuestionsDue Diligence Threshold QuestionsDue Diligence Threshold Questions

Why is the property being purchased? Why is the property being purchased? Owner-Occupied? “Financial Buyer”? Looking for ROI or Cash Flow Developer? Improve Property or Change Use

How will the property be used? How will the property be used? Current Use or Non-Conforming Use? Rezoned or Subdivided? Purchaser’s Intended Use?

Due Diligence Must Answer ThesegQuestions

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Organize Due Diligence TeamOrganize Due Diligence TeamOrganize Due Diligence TeamOrganize Due Diligence Team

Due Diligence Team Confirms Property Questions Due Diligence Team Confirms Property Questions Architect Engineer Contractor Accountant/Auditor Environmental Consultant Land Use Consultant

Assemble Team Before Entering into Contract Confirm availability Confirm licenses and insurance certificates

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Create Due Diligence ChecklistCreate Due Diligence Checklist Detailed List of Information to be Obtained Schedule of Inspections to Take Advantage of Periods of

A PAccess to Property Ensure Order of Inspections (e.g. structural engineer to review

structure before contractor and architect to determine any cost of repairs)

Allocate Each Piece of Information Sought to a Particular Member of Inspection Team

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Four Basic Due Diligence Questions toFour Basic Due Diligence Questions to Answer

A ?Access? Adequate streets, highways, drives, curb cuts, traffic lights Access easements and other appurtenant easement rights?Access easements and other appurtenant easement rights? Pedestrian access, public transportation Railroads Demographics ADA compliance

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Use?Use? Zoning and private land use controls Occupancy restrictions, exclusive uses Adequate utilities for intended use Site topography Quality of soil compaction for constructionQuality of soil compaction for construction Environmental condition Water, oil, mineral, natural gas, timber rights Other factors….

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Condition of Property?Condition of Property? Structural issues Condition and remaining useful life of major components

( h i l t f t i ll)(e.g. mechanical systems, roof, curtain wall)

Code compliant? Any deferred maintenance? Determine costs of repairs or replacements for intended

use prior to purchase

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Finances and Financing?Finances and Financing? Can fund be obtained to acquire and operate (or construct)

the Project?B ’ D Dili i B k’ D Dili Buyer’s Due Diligence is Bank’s Due Diligence

Satisfy Lender’s Conditions through Due Diligence Requests Confirm all sources of cash flow Confirm all costs associated with operating and ownership

of the Property Will investor or developer receive an adequate return on its

investment?

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Due Diligence Terms of the Due Diligence Terms of the P h A tP h A tPurchase AgreementPurchase Agreement

Time Periods for Due Diligence Examinations Confirm with client that time periods are sufficient Different periods for different examinations Different periods for different examinations Coterminous? Complete Physical Exam Before Starting Remaining Due

Diligence?Diligence? Unilateral right to extend Due Diligence? Deposit Additional Earnest Money?

A k l d A t Oth P t C diti ? Acknowledge Acceptance on Other Property Conditions? Conditional acceptance of conditions? Ability to re-inspect or re-open Due Diligence if conditions

change

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Inspection of Materials Confirm with client list of materials sought in Due Diligence List Varies with Client’s Intended Use Include “Catch All” Provisions So Not Limited in InspectionsInclude Catch All Provisions So Not Limited in Inspections Confirm with Lender List of Materials to Request

Seller to warrant/certify materials provided in Contract? Time period for Seller to provide materials Time period for Seller to provide materials Due Diligence Automatically Extended if Do Not Receive

Materials Coordination of Inspection of On Site Materials Coordination of Inspection of On-Site Materials Require Seller to Provide Copies in Contract? Benign Notice Provisions in Advance of Inspection

Abilit t R I t Ability to Re-Inspect

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Inspection of Property Reasonable hours of inspection and reasonable notice prior

to inspection Negotiate reasonable insurance requirements for g q

Purchaser’s inspecting parties Require seller to provide access to entire property,

including roof, basement, etc.; otherwise, Due Diligence is g gextended

Include provisions for procedures and ramifications if invasive tests are requiredq

Likely required to indemnify seller for damage from inspections

Hot Button Issue: Ability to Interview Tenants? Hot Button Issue: Ability to Interview Tenants?

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Ramifications of Due DiligenceRamifications of Due Diligence Include provisions to anticipate outcome of inspection (e.g.,

detail what happens if Phase I requires Phase II)

Requirements for Buyer to diligently perform due diligence? Requirements for Buyer to diligently perform due diligence? Must include Buyer’s unfettered right to terminate Contract

during due diligence period B d B ’ S l d E l i S bj ti J d t Based on Buyer’s Sole and Exclusive Subjective Judgment without Regard to Commercial Reasonableness

Buyer Should Not have to Provide Reason for Termination or Evidence of Reason for TerminationEvidence of Reason for Termination

What Rights does Seller have to Cure Inspection Issues, if any? Must Buyer Share Completed Inspections and Studies with

Seller? (will Seller reimburse?)Seller? (will Seller reimburse?)

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DISCLAIMERDISCLAIMERDISCLAIMERDISCLAIMER

This information and any presentation accompanying it (collectively the "Content") has beeny p p y g ( y )prepared by Larry N. Woodard of Robbins, Salomon & Patt, Ltd., an Illinois corporation (collectively“RSP”) for general informational purposes only. It is not intended as and should not be regarded orrelied upon as legal advice or opinion, or as a substitute for the advice of counsel. You should notrely on, take any action or fail to take any action based upon the Content.

As between RSP and you, RSP at all times owns and retains all right, title and interest in and to theContent. You may only use and copy the Content, or portions of the Content, for your personal, non-commercial use, provided that you place all copyright and any other notices applicable to suchContent in a form and place that you believe complies with the requirements of the United States'Copyright and all other applicable law. Except as granted in the foregoing limited license withrespect to the Content you may not otherwise use make available or disclose the Content orrespect to the Content, you may not otherwise use, make available or disclose the Content, orportions of the Content, or mention RSP in connection with the Content, or portions of the Content, inany review, report, public announcement, transmission, presentation, distribution, republication orother similar communication, whether in whole or in part, without the express prior written consent ofRSP in each instance.

This information or your use or reliance upon the Content does not establish a lawyer-clientrelationship between you and RSP. If you would like more information or specific advice of mattersof interest to you please contact us directly.

© 2011 Robbins, Salomon & Patt, Ltd., All Rights Reserved.

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D Dili i C i l R l E t tDue Diligence in Commercial Real Estate Purchase Transactions

b 3 20December 13, 2011

Paul J. Johnson, PartnerSHANNON, GRACEY, RATLIFF & MILLER, L.L.P.

1000 Ballpark Way Suite 3001000 Ballpark Way, Suite 300Arlington, Texas 76011

(817) 299‐[email protected]

TITLE AND SURVEYWill you own the property and can you use it?

• Obtain title insurance commitment and legibleObtain title insurance commitment and legible copies of all documents referenced in the commitmentcommitment.

• Obtain the existing plat and have the property surveyedsurveyed.

• Review and analyze, revise and repeat.

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TITLE COMMITMENTWill you own the property?

• Analyze the title commitment: Schedules A, B and C.Analyze the title commitment: Schedules A, B and C.– Accurate property description

– Accurate purchaser’s name

• Review all documents listed in the commitment– easements, recorded leases, or other rights of third parties to use the property?

– restrictions on use?

i ti d bli ti t i t i– owners associations, dues, obligations to maintain, insurance, indemnities?

– Third party consents required?

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p y q

TITLE COMMITMENTTITLE COMMITMENT

• Consider obtaining estoppel letters in favor of purchaser (and purchaser's lender, if any) in connection with the acquisition.

• Meet lender’s requirements for the mortgagee policy• Meet lender s requirements for the mortgagee policy.• Prior to expiration of the title review period, send an

objection letter that meets the requirements of the sale t tcontract.

• Ascertain the availability and cost of any endorsements to the final title insurance policy to address concerns of the purchaser.

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SURVEYWho else is using the property?

• What is the configuration of the land andWhat is the configuration of the land and improvements?

• Are there encroachments from improvements• Are there encroachments from improvements on the land?

L ll i f d h i l• Locate all items referenced on the title commitment.

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SURVEY REVIEWSURVEY REVIEW• Review title commitment and lender requirements.• Property descriptions on the survey and title commitment must conform.• Compare the calls on the metes and bounds description to the calls on the

survey.• Matters in the title commitment must be shown on the surveyMatters in the title commitment must be shown on the survey.• Understand symbols, abbreviations and surveyor notes.• Look for encroachments.• Check for utilities.• Show set back lines from plat or local ordinances and look for

encroachments.• Locate easements.

h k id i l i d• Check access. Consider title insurance endorsement.• Flood plain/flood way areas.

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Survey CertificationSurvey Certification• Certify to Purchaser, Lender and Title Company;• Certificate address:

– access– all title commitment matters shown– boundary lines dimensions area set back linesboundary lines, dimensions, area, set back lines– easements, rights‐of‐way, encroachments– location, size, type of improvements– utilities

h– other matters• Not within “Special Flood Hazard Area” or “Special Hazard Area” except as

shown;• Meets “Minimum Standard Detail Requirements from ALTA/ASCM LandMeets Minimum Standard Detail Requirements from ALTA/ASCM Land

Title Surveys”;• Signed and Sealed.

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Zoning and Local OrdinancesZoning and Local Ordinances

• Can you use the property for the purposes youCan you use the property for the purposes you contemplate?

• What is the zoning?• What is the zoning?

• Zoning letter from City

• Will Seller re‐zone property before closing?

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PlattingPlatting

• Determine whether the property will need to be replatted prior to closingbe replatted prior to closing.

• Provide for replatting in the sale contract.

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A Brief Word about Minerals InterestsA Brief Word about Minerals Interests

• Who owns them? Are they leased?Who owns them? Are they leased?

• If severed, be concerned about surface rights.

f l d b d b ( ) i h f h• If leased, be concerned about (a) rights of the lessee to conduct activities on the property d (b) h f h land (b) the terms of the lease.

• If the minerals owner/lessee has surface rights, consider negotiating a surface use agreement before the acquiring the property.

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Due Diligence in Commercial Real EstateDue Diligence in Commercial Real Estate Purchase Transactions

Strategies to Identify and Mitigate RisksStrategies to Identify and Mitigate Risks and Liabilities Pre‐Closing

Tuesday, December 13, 2011

R b t K CRobert K. CaseyAttorney at Law

Carlsbad, Californiaa sbad, a o a(760) 295‐1764

[email protected] robertcaseylaw comwww.robertcaseylaw.com

UCC and Other SearchesBefore you start drafting the PSA ensure your client clearly describes for youBefore you start drafting the PSA, ensure your client clearly describes for you all interests being transferred in the sale. Not just realty, but personal property, vehicles, equipment, fixtures, accounts receivable, notes, etc…. The type of property being transferred will impact the types of searches you maytype of property being transferred will impact the types of searches you may conduct to determine if there are outstanding security interests.

• Conduct UCC searches to identify encumbrances affecting personal t th t t id tifi d b th titl i t fproperty that are not identified by the title insurance company as part of

the title search process. These searches can also help confirm the accuracy of the title insurance company searches of the real property.

• Judgment and tax lien searches can confirm (or take the place of) corresponding contract representations and warranties by the seller on those matters.

• Building code violation searches are useful to supplement the purchaser's physical due diligence on the property, especially in situations where the purchaser plans to undertake renovations of the property after acquisition

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Review of Financing/Loan Documentsdi i f i d i i f fi i d i b dA discussion of preparation and negotiation of financing documents is beyond

the scope of this presentation, however, there are certain things you can do to assist your client in identifying risks and mitigating potential costs associated with financing before committing resources to the transactionassociated with financing before committing resources to the transaction.

• Is the seller prepared and able to satisfy its existing loan at closing? Does the PSA give buyer remedies (costs and expenses) if seller fails to do so?

• Can you get a demand letter from seller’s lender and evidence of funds if the sale price does not exceed the outstanding debt?

• Does the seller’s financing allo for prepa ment or a defeasance?• Does the seller’s financing allow for prepayment or a defeasance?

• Are there any issues with the ability of the seller or its lender to reconvey the existing deed of trust or terminate any financing statements?

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Review of Financing/Loan Documents

Can the buyer meet the lender’s loan requirements?

• If a loan commitment is used, it should state most of lender’s major requirements. Ask in advance for a draft of the loan commitment, lender’s duerequirements. Ask in advance for a draft of the loan commitment, lender s due diligence checklist and any insurance requirements to flesh out some of these issues in advance.

• Ascertain the form and format of any required due diligence reports• Ascertain the form and format of any required due diligence reports.

• Survey, title policy, opinion letters, water/utility letters, bldg inspections, appraisal, environmental reports, soils reports.

• Make sure the consultants/providers buyer plans to use are approved in advance by the lender.

C i t b d t d li l tt d t ?• Can prior reports be updated or reliance letters used to save money?

• Post closing, what type of reporting (financial and other) and insurance will be required and can buyer comply?

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Review of Financing/Loan Documents

Selected issues:

•Loan Commitment

•Loan Agreement

•Promissory Notey

•Deed of Trust

•Assignments (Rents Leases and other)•Assignments (Rents, Leases and other)

•Guaranties

UCC Fi i S d Fi Fili•UCC Financing Statements and Fixture Filings

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Leases

• Income producing properties: You’re really buying a business.• Require in PSA that copies of leases be provided early in due diligence process.• Read the leases! Look for:

Tenant termination rightsRenewal rightsOptions to purchase/leaseOptions to purchase/leaseCAM audit rightsFinancial terms (rental amounts, deposits, CAM charges, credits)Landlord obligations

•Prepare a lease matrix of material terms and financial terms; compare to seller’s rent roll.• If possible, require seller to represent factual matters about tenancies to buyer and to certify a rent roll at closing. Even though tenants may be required to provide estoppels, don’t plan on receiving them.

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Review of Leases (cont’d)

• Address security deposit prorations in the PSA.• Tenant estoppel letters:

C fi l d d tConfirm lease and amendmentsConfirm rent and termExisting defaults by landlordP d fPayments and prepayment of rentPurchase options/ROFSecurity depositC di i f iCondition of premises

• Assign leases at closing. Notify tenants and ensure all future rents are sent to the buyer as the new Landlord. y• Seek a post closing obligation from seller in the PSA to immediately send buyer all post closing rents.

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