Commercial real estate transactions are quite different from residential property purchases and sales, as there are many hazardous pitfalls along the way that can put the business owner at financial risk. Whether it is for an expansion of an existing enterprise or the initial plunge of a startup, the business owner can benefit from being aware of the complexities of the process.
Not only is due diligence essential, which must include a careful title examination and inspection, engaging in a real estate transaction where the client is not aware of various state laws and local ordinances can put them at risk. For the business owner entering the Phoenix area real estate market, it is important to have knowledgeable and skilled legal advice on hand to assist in all contractual aspects of the transaction.
Due diligence and initial agreement
There is an order to the steps in the process of buying or selling commercial real estate which may involve special considerations or negotiations. The preliminary buyer and seller agreement is usually memorialized with a term sheet or letter of intent (LOI) which serves to identify the parties as well as their individual intentions. There may also be specific provisions in the initial agreement that will also be in the formal agreement.
Due diligence is essential for investigating and identifying:
- title and survey
- service contracts, management agreements and leases
- engineering and environmental factors
- zoning regulations and use compliance
Negotiation of terms
Both sides will negotiate the terms and conditions that will satisfy their needs during the formation of the purchase and sale agreement. Important aspects of the agreement that both parties will negotiate will typically include:
- Representations and warranties, which lay out risk factors as well as liability and indemnification obligations should there be representation inaccuracies, or if a warranty is breached
- Covenants that establish the obligations for maintenance and repair, as well as maintaining insurance and the release of the seller to enter into new contracts
- Closing conditions, which set the conditions for the buyer to acquire the property and finance the purchase, as well as contingencies of use
- Prorations and credits.
Each transaction may also contain issues that can be affected by industry-specific considerations, local laws, financing and other factors. Understanding the process can help prepare the business owner for potential risk while also clarifying their goals from the outset.