Commercial Real Estate Acquisitions: Key Considerations
When considering a real estate acquisition, prospective buyers will face a host of issues that must be vetted to ensure the transaction is successfully executed. This blog post will focus on a few of the key considerations during this process.
1. Due Diligence Period
A key component of the purchase agreement is the period during which a prospective buyer will have the right to inspect the property while also having the right to a return of the earnest money pending its investigation. A buyer will need to ensure that there is adequate time to review all the relevant information related to the asset and to coordinate and review any third-party reports that are advisable or required to consummate the deal. For example, if there is a debt component to the purchase price (which is almost always the case), the lender will likely require a survey, lender title policy, property condition report, and environmental study. Though a buyer would be wise to obtain these reports, as applicable, in the absence of a loan, irrespective, the preparation of these various documents will take time. A seller will want to limit the time during which the earnest money is refundable, but ultimately the parties will need to agree to a reasonable period for due diligence to run its course.
2. Title & Survey
During the due diligence period, two key items for review will be the title commitment and survey of the property. These two reports work together and will give a buyer clarity regarding the status of the property. The title commitment (commitment by the title company to issue the insurance policy should the buyer meet all requirements) will include all instruments recorded in the public records against the property. Examples of these instruments include the plat, CC&Rs (restrictive covenants), easements, lease memoranda, etc. The surveyor will then plot any of these instruments that can be shown in the depiction, and a buyer can review how these recorded rights affect the property. An example of this is where a surveyor draws the area on the survey where a utility easement encumbers the property, and as a result, any incoming owner would have limited rights (or no rights at all) to the use of that portion of the property. This brings along questions related to access to the utility, and obligations to repair the surface of the land after any maintenance or replacement of the utility. Ideally, these third-party rights and obligations will be explained in the recorded instrument itself.
3. Tenant Estoppels
Typically, a commercial trade will implicate the current user or users of the real estate asset, and a prospective buyer will need to understand the status of the lease or leases in place at the property. Buyers use a tenant estoppel to ensure that any lease in place at the property meets certain criteria. A typical estoppel will be signed by the tenant and the seller and will reflect that the lease is in full force and effect, that there is no continuing default under the lease, the amount of the security deposit being held, the term and amount of rent, and any tenant rights of first refusal or extension rights. Though this is not an exhaustive list, a buyer will want to review any existing leases to properly request a tenant estoppel (as the lease will typically set forth the mechanism for obtaining an estoppel from the tenant) and to push for as much information from any tenant as possible.
There is much to navigate when acquiring commercial real property, and it is in the best interest of any prospective buyer to ensure that they have the right team to advise through the transaction
ABOUT THE AUTHOR
John Daskam joined Milgrom & Daskam as a Partner in January 2019. He focuses his law practice on real estate and corporate law. His real estate practice includes acquisitions and dispositions, landlord-tenant matters, leasing, financing, development, and contract preparation and negotiation.
FinCEN and Real Estate: Additional Disclosure Requirements May Be On the Horizon for Real Estate Transactions￼
As part of the anti-money laundering regime under the Bank Secrecy Act of 1970 (the “BSA”), in late 2021, the Financial Crimes Enforcement Network (“FinCEN”) division of the Department of the Treasury issued an advanced notice of proposed rulemaking (“ANPRM”) seeking to address potential money laundering through real estate transactions. The comment period for the ANPRM closed on February 21, 2022. This ANPRM comes closely after the notice of proposed rulemaking related to the implementation of the Corporate Transparency Act (the “CTA”), which you can read more about here. Both the CTA and the proposed regulations under the ANPRM would require significant levels of disclosure regarding the beneficial ownership of companies and real estate in non-financed real estate transactions. These measures aim to reduce money laundering, and assets held by undisclosed foreign investors. It is estimated that between 2015 and 2020, at least $2.3 billion was laundered through U.S. real estate, though the actual figure is likely much higher Accordingly, both FinCEN and Congress are trying to limit the number of real estate transactions used to launder money.
Two new laws are set to take effect in the coming months that will require employees to examine their current practices and make changes to bring themselves into compliance.
When I joined Milgrom & Daskam at the height of COVID, I wasn’t sure what the future would look like for me or this relatively young firm. We were giving up our physical office space in downtown Denver and embarking on a new vision for remote workers. Up until then, much of my professional work life was spent in an office environment, surrounded by colleagues My days were punctuate by in-person meetings–formal, over coffee or meals.in the hallways–and bookended by my daily commute between Denver and Los Angeles which ranged anywhere from just under 30 minutes to more than an hour.