When you think about purchasing/selling real property, the biggest and most obvious thing that comes to mind is the sale price. While I would agree with you that this is very important, there are many other issues that should be carefully thought out when preparing a letter of intent (Offer to Purchase) commercial property. For the purposes of this blog, I will focus on some of the items that should be considered as you prepare your proposal to acquire real property.

Deposit

Deposits are another dollar figure besides pricing to consider. The deposit is what the buyer would put up at the execution of the purchase contract in order to provide comfort from the seller’s side in order to “tie up” their property. There are numerous expenditures that a buyer must endure when acquiring real property and I would not recommend a buyer spend a tremendous amount of money until they have the property under contract. What would be the point of spending money for items such as legal, title, mortgage commitments, appraisals, engineering reports etc. at the risk of losing the property to another bona fide purchaser? From the seller’s perspective, they want to make sure that if the buyer does not live up to the expectations spelled out in the purchase contract, they have some recourse against the buyer, and therefore, they must carefully weigh the expectations of the buyer prior to agreeing to the deposit moneys required in order for them to take their property off the market for a period of time. And oftentimes, real property can be placed under contract for long periods of time; they may even want to consider drawing on the deposit funds for the benefit of the buyer waiting to close. In other words, time is money and if a buyer wants to hold up a property under contract, they may be required to pay for this right. In other words, the buyer pays an agreed upon figure for the option to close at a later date in the future.

Due Diligence Period

The due diligence period is a critical piece of the puzzle when acquiring real property because once a contract is executed, this is the period of time allotted to a buyer to do their “homework” to determine what it is that they are actually purchasing. As mentioned above, buyers will spend money during this time period on items such as legal fees, engineering reports (environmental and structural reports), financing commitments which could include money to secure a loan commitment, appraisal, title search, etc. The buyer and seller will carefully negotiate the period of time allowed for the buyer to get all their ducts lined up and prepared to close or terminate the contract. Today, due diligence periods are generally longer in length than provided in purchase contracts when the market was much more active. Two years ago when there were multiple buyers willing and able to move forward, sellers were driving these period down because they could; they would simply go to contract with another buyer willing and able to move faster. Today, the buyer has more leverage to negotiate this term in their LOI or purchase offer proposal.

Right to Review Due Diligence Materials

If you are purchasing real property, you want to review all the documentation that you can uncover relating to the property. Buyers oftentimes will rely on information provided by the seller of the property. You want to make sure that the Seller complies with all your requests during the due diligence period to provide you the important information you need to make sure you know what you are buying. You want the Seller to provide you with requested materials in a timely fashion because you have a set amount of time before your deposit money goes hard, and it is reasonable to request your due diligence period be extended in the event the seller is not cooperating with your attorney’s request for certain information in a timely manner. This is a great example of why it takes so long to purchase real property.

Right to Conduct Invasive Testing

A buyer acquiring industrial property in the state of NJ has another layer of things to worry about that someone purchasing an office building may not be subject to, environmental. Most industrial sites in NJ have some environmental issues that need to be dealt with when acquiring property and because the seller is often trying to rid themselves of this liability once the buyer takes title to the property, this subject must be taken seriously and it is advisable to work with an attorney who has a full understanding of environmental law. Buyers looking to place financing on the property upon closing are forced to deal with this issue because lenders are very careful to take on property that is environmentally challenged, and the responsibility to clean that contamination could cost a substantial amount of money and even exceed the real value of the property and lenders to not want to be faced with this situation. Therefore, a buyer using all Cash to acquire real property have to be educated enough to know how to handle this situation. In other words, the term often used to describe the buyer is caveat emptor or let the buyer beware!

Seller’s Obligation to Maintain Property Prior to Closing

When a property is under contract, who is responsible for maintain the property? This is another important issue to negotiate in the sale contract because a lot can happen (or not happen if the case may be) between the time a property is first inspected by a potential purchaser and the time of closing. If you are the buyer, you want to make sure the seller maintains their responsibility up until the closing date. In retrospect, the Seller should want to maintain their property as if the sale never goes through because oftentimes a contract purchaser backs out of the contract during the due diligence period for many reasons that go beyond the scope of this blog.

Summary

I have only begun to touch upon some of the important items that must be carefully examined and prepared in a letter of intent to purchase real property. These items can all be dealt with in an organized manner if you have the right commercial realtor handling the job on your behalf. The most important reason you want these items carefully negotiated up front is because if done properly, you will save time and money in the long-run. Who do you know that does not care about wasting their time and/or money? The more that is handled properly up front, the less time your attorney will have to deal with it later on. And a good attorney will greatly appreciate the leg work the broker does in preparation for them to take the deal to the next level. And Brokers do not charge hourly like your attorney will so next time you are going to acquire property, you may want to think about the broker you are using to represent your interests. Do you want to be the one that spends unnecessary time and/or money when you can prevent it from the beginning?

NJ COMERCIAL REAL ETATE ALLIANCE (www.njcrea.com).

I have been mentioning the NJ Commercial Real Estate Alliance over the past few months and I am happy to say that the website is up and running LIVE today and offers some really great tools free of charge to add to your quiver. You will not only find blog posts from the other members on this website, but also a plethora of information pertaining to commercial real estate. This can be your “One-Stop-Shop” for all professional resources required for a successful real estate endeavor. You will find 13 established firms representing this alliance and I welcome you to reach out to anyone of us individually or collectively; we are Independently Proven, Collaboratively Strong NJ Expertise! You can ask questions, respond to materials posted by any of the members associated with this alliance, and see a plethora of real time news articles pertaining to the real estate industry from many facets! Feel free to maneuver through the site and your leisure and I welcome your feedback! You can also sign up to receive daily news feeds delivered to your email that include information regarding business in NJ, architecture, legal, local and national commercial real estate, and much more! Please let me know if there is information you would find beneficial to you and I will work diligently to get that knowledge into your hands; after all, knowledge is power!! I guarantee if you have a commercial real estate dilemma, we can help you solve the issue(s) professionally, ethically, and most importantly, in a timely fashion! Welcome to the NJ Commercial Real Estate Alliance (www.njcrea.com).

And to you and your families, Happy Holidays!

"See" you in 2010!

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