Real Estate Transactions & Litigation Attorney
Dear subscribers and fellow real estate investors:
I recently appeared on a national podcast with Club 500 Real Estate Network, a streaming live Q & A session. We had a lot of fun and covered a lot of great topics – including LLC strategy and asset protection to trusts, legal issues that come up in purchasing in real estate, umbrella insurance, and much more. I hope you enjoy my podcast and please feel free to reach out with any questions. The link is below!
Seller financed Investment properties are great opportunities for investors to expand their real estate portfolio without using traditional lending. Seller financed deals are exactly what they sound like: The seller, instead of a traditional bank, provides the financing to the purchaser, usually with a secured mortgage on the property being purchased. Seller financed deals can be a good way for an investor to do a deal even though s/he does not qualify for a traditional mortgage. While seller financed deals can be advantageous for investors, there are a number of things to know. Below are five points every investor should know before getting involved in a seller financed deal.
Since you are dealing with an individual or a small company and not a traditional bank, you are free to negotiate any term of the seller financing documents. This is much different than a real estate transaction with a traditional bank where you have very little leverage to change the terms (e.g. interest rate, term, amount of financing, etc.). You can ask for one hundred percent financing in exchange for a shorter term or higher interest rate, and you may even negotiate more specific items such as the cure period in the event of default. Some sellers will be open to negotiations while others may not. However, often times a seller may insist on less favorable terms than a traditional bank understanding that some purchasers may not be able to obtain traditional financing. The takeaway is that seller financed deals are very different from deals with a traditional bank and any term of the mortgage or promissory note is potentially negotiable.
A seller financed deal may move a lot faster than a deal involving traditional bank financing. This is because you do not have to wait for the bank to go through a long checklist of items before it will provide the clear to close. With seller financing, a seller will typically have a due diligence period to investigate the financial wherewithal of the purchaser. If the seller finds the purchaser’s financial wherewithal acceptable, a closing can be scheduled soon, and the attorneys will simply draft the mortgage and promissory note (and any other documents agreed upon). This timeline is potentially much faster than using a traditional bank. Therefore, one of many advantages of a seller financed deal is that such deals are streamlined and can close a lot faster than deals with traditional bank financing.
If you are contemplating a seller financed deal, it is important to review a title search of the property to determine whether there are other existing mortgages on title. If there are mortgages already on the property, and you are taking title subject to existing mortgages, there is heightened risk to doing a seller financed deal. The seller financing may violate the due on sale clause on any existing mortgages. Moreover, mortgages may provide that you cannot further mortgage out the property without the bank’s permission. Therefore, there is a risk that a seller financed deal subject to an existing mortgage can trigger a default on the existing mortgage. A seller financed deal is ill-advised when there are other mortgages on the property, unless these banks consent to the transaction.
Moreover, from a seller’s standpoint, even if the other banks did consent to the seller financing subject to existing mortgages, a seller may not be secure in the event a foreclosure is necessary. In other words, the balance on the existing mortgages may be high enough so that a foreclosure on the Seller’s mortgage may not satisfy the seller’s loan. There are therefore concerns from both the seller’s and buyer’s perspective on a seller financed deal if there are existing mortgages on the title. Many investors believe seller financed deals with other mortgages on title are not worth the risks. However, other investors may have a higher risk tolerance.
As with a traditional bank, the promissory note can be sold to another entity. The fact that seller financing was used in the deal does not mean that the seller is prohibited from then selling the note either to another individual, bank, or company. Therefore, do not be surprised if you receive a notice one day that your note has been sold and you will now make payments to a different entity.
Every investor should know that if the seller agrees to provide seller financing, you should not wait until a few days before the closing to discuss the terms of the financing. It is important to discuss the terms of the financing even before you sign the contract. This way, you can, and should, include provisions in the contract that specify the material terms (e.g. interest rate, term, balloon payments, prepayment penalty, etc.) so there is no misunderstanding when the financing documents are being drafted by the lawyers.
In summary, seller financed deals are great opportunities. Keep the above items in mind, and you will be better prepared to negotiate and close a seller financed deal without any issues.
If you find a property that is perfect except for the fact that the tenants are paying below market rent, this strategy may be effective for you. An investor in this scenario should consider including a provision in the purchase and sale contract that gives them thirty days to negotiate new leases with the underperforming tenant(s) that include higher rents that are consistent with market rates. If the investor is successful in negotiating new leases, then he/she may move forward to closing and the new leases become effective upon closing. Therefore, when you close, you will have tenants that are on better leases and paying market rents. If the investor is not successful negotiating new leases on acceptable terms, then the provision will give you the right to terminate the contract and not move forward.
So, how does an investor sign a lease with a tenant when the investor has not even closed on the property? Is this possible? Sure. With careful drafting and lawyering, this is feasible. The new leases will be expressly conditioned on the closing occurring. Therefore, if the closing occurs, the new leases become legal and binding documents. If the closing does not occur, the leases do not become legal contracts, and the tenants have no obligation to pay a higher rent and remain on the original arrangement.
While this can be an effective strategy to addressing good properties with underperforming tenants, retaining a good lawyer to draft the right provisions is essential to achieve your objectives and properly protect you.
Another strategy to address tenants in default or paying below market rent is to offer them a sum of money to vacate the unit so that you can find better tenants that will pay rents more consistent with market rents. However, investors can only use this strategy after closing, so there is a risk that after you close you may not be successful in negotiating a deal where the tenants vacate. You may be stuck with defaulting or underperforming tenants for the near future if you cannot negotiate this deal. This is a consideration in closing and using this strategy.
Another strategy is to simply raise the rents after you close. However, there are several considerations. First, this may not be legally feasible if the tenants are on written leases. As the new owner, you must honor the term of the existing lease (until it expires). If the tenants are month-to-month, the tenants may still refuse to pay higher rent. Then you have to decide whether to evict, or keep them. Last, before implementing this strategy, you should check whether the town or city has rent control rules which may impose limitations on how much you can raise rent. While raising rents is a common strategy for improving the cash flow of these properties, these are considerations to think about before moving forward.
A good strategy that hedges the risk of underperforming tenants is simply to negotiate a lower purchase price. There is a valid argument that an investor should be entitled to a lower price because they may face strong objections when they try to evict a defaulting tenant or raise the rent on an underperforming tenant. This may be a good negotiation point to lower the purchase price.
By: Edward Schenkel and Eric Jacobi
States have needed to continuously update their coronavirus response protocols as infection rates rise and as the world learns more about the Covid-19 pandemic. Moreover, the Centers for Disease Control and Prevention (CDC) also provides guidance that states, business owners, and landlords should follow. Landlords and businesses are expected to keep up with the myriad changes, implement programs and policies in accordance with the protocols and guidance, and take new precautions as the situation evolves. Both landlords and businesses may face liability if they fail to adhere to the protocols and rules, or fail to adapt to changes quickly enough, even when the precautions already taken would have been viewed as sufficient just days before. Many states invite whistleblowers to report noncompliance, and failure to abide by the applicable rules can lead to fines and possibly even lawsuits. Accordingly, it is important that landlords and business owners promptly identify the applicable rules and protocols, that they implement compliant programs and policies so that people stay safe, and that owners mitigate their potential liability.
Although each state has different rules, the CDC and state guidelines provide that landlords generally are responsible for maintaining and cleaning common areas. This includes lobbies, communal bathrooms, hallways, and stairways. The CDC provides detailed guidance on the types of cleaning solutions that should be used. Owners of office buildings should also increase ventilation and circulate outdoor air where possible. The particular details, however, often present unique challenges to landlords who are used to operating under one set of rules, only to discover a different set now applies.
As a firm with offices in Connecticut and Virginia, we will be focusing this document on the law of these two states. Under Connecticut law and CDC guidance, landlords should develop a cleaning plan to ensure their buildings remain safe. In addition to thoroughly cleaning the common areas, buildings should post signs displaying the updated policies, including social distancing, use of masks, and ordering people to go home if they are sick. Facilities are encouraged to complete a self-certification to receive a “Reopen CT Badge” which advertises that the building adheres to Connecticut’s rules.
Business owners and landlords should be aware that Governor Ned Lamont has reverted back to Phase 2.1 in Connecticut. While marketed as a “slightly modified version of Phase 2,” this stage introduces several material changes that can confuse even careful observers.[1] For instance, private gatherings in indoor commercial venues may have no more than 25 people, the same as in Phase 2. However, private gatherings in outdoor commercial venues can have no more than 50 people (far fewer than the 100 allowed in Phase 2). A commercial venue could receive fines for hosting a group of 75 people, mistakenly thinking the gathering was still legal under Phase 2 rules. It is important to note that the capacity requirements vary depending on the type of business, so it is essential to check with the Phase 2.1 regulations before implementing a capacity policy for your business or building.
Overall, restrictions under Virginia law are similar. Owners must ensure that social gatherings are limited to 50% of the event spaces’ occupancy or 25 people, whichever is less. However, one particularly unique aspect is that different parts of the Commonwealth can operate under different sets of rules. For instance, until recently, it was only restaurants in the Eastern Region of Virginia which were required to stop selling alcohol in restaurants at 10 PM. A restaurant chain’s Virginia Beach location, therefore, had different responsibilities than the same restaurant’s Alexandria location.
Landlords and business owners must be diligent to ensure compliance with rules and guidance promulgated by the CDC. It is better to proactively avoid problems than to react to accusations or respond to whistleblower complaints or even lawsuits. Landlords and business owners should be vigilant in complying the state rules to mitigate potential liability. The stakes go beyond just avoiding a fine; these actions also help save lives. And regardless of the financial penalties, the public relations problems alone should incline landlords to comply with the rules.
Legal counsel
can help you navigate the Covid-19 rules so that buildings avoid noncompliance,
mitigate potential liability, and minimize the risk of spreading Covid-19. Jacobi, Case & Speranzini has trained
lawyers in both Connecticut and Virginia who are available to answer questions.
[1] “Latest Guidance,” Connecticut Covid-19 Response; available at: https://portal.ct.gov/Coronavirus/Covid-19-Knowledge-Base/Latest-Guidance (Nov. 6, 2020).
Investing in multi-family property is a great way to build wealth. Multi-families are also great first investments for new investors looking to make a smaller purchase to get their feet wet before buying something bigger. However, when buying a multi-family property there are a number of legal issues that every real estate investor should be aware of that do not arise when purchasing a condominium or single-family home. I have outlined three important issues to consider when purchasing a multi-family property.
One of the first things I advise clients buying multi-families is that they need to understand whether the property is a legal multi-family. This comes in two forms: it must be either a permitted use under the current zoning regulations or a “legally non-conforming” property. If it is neither, then the purchaser may be in for serious problems down the road. That is why every investor should understand the zoning issues that can arise when purchasing a multi-family property and how to navigate through them.
If the multi-family property is a permitted use under the zoning regulations, then you can rest comfortably that the property’s use does not violate the zoning regulations. However, what if the multi-family is in a zone where a multi-family property is not a permitted use? Is it an illegal use, and therefore should a buyer shy away from the purchase? Not necessarily?
The multi-family property may be a legally non-conforming use. A property is considered legally non-conforming if the use complied with the zoning requirements prior to the date that the town changed the zone to remove such use from that zone. For example, if a multi-family was a permitted use in the R2 Zone in 1999 and the town thereafter removed multi-family from the R2 zone, as long as the property was in use as a multi-family prior to the change of zoning it can continue as a multi-family property after the change of zoning as a “legally nonconforming” property.
However, it is possible that an owner illegally converted a property to a multi-family property in a zone that does not permit it. This would mean the property is an illegal multi-family, and is therefore a property you do not want to purchase. This is why it is important to explore the zoning and the history of the property to make sure you do not purchase a property that violates the zoning regulations. As long as the property is in a zone that permits multi-family or the property is legally – nonconforming, you can safely purchase the property. Make sure you ask your attorney these questions as part of your due diligence activities.
Buying a multi-family, or any property with tenants, is a transaction that comes with risks and potential exposure to liability. For example, what if a tenant slips and falls and files a lawsuit against you arguing that her injuries are a result of you failing to comply with your obligations under the lease? What if a tenant accidentally starts a fire that spreads and causes damage to other homes in the surrounding neighborhood? These are examples of the inherent risks in buying multi-family properties. One important thing you can do to limit your liability is to create a Limited Liability Company (LLC) and to take title in the name of the LLC.
Taking title in the name of the LLC will limit your liability to the value of the Property and will insulate you from most personal liabilities. Since the LLC is the owner of the property, any lawsuit concerning the property properly names the company as the defendant and not you individually. Since the LLC’s only asset is the property, the maximum exposure from any lawsuit is the value of the property. In other words, any judgment obtained by a tenant, neighbor, or other potential plaintiff may only look to the company’s assets to satisfy the judgment, and not your personal assets. If the property was owned by you individually, a plaintiff could look to your personal assets (bank accounts, other real estate, etc.) to satisfy a judgment.
Setting up the LLC may seem like a simple process, but there are various things to consider. For example, if you are creating the LLC with more than one member, you should think about the authority of each member. Drafting a detailed operating agreement will prevent problems between members in the future.
When buying any property with tenants, it is essential to do your due diligence with respect to the tenants and the leases. As an investor, you want to make sure that the tenants are current on the rent. You do not want to purchase the property only to learn that the tenants are six months behind on the rent and are vigorously fighting an eviction lawsuit. Therefore, it would be prudent to request that the seller sign a document called an estoppel certificate. This document will require the Seller to make a representation that the leases are in full force and effect and that the tenant, and current on the rent.
It is also prudent to review each lease with your attorney. You should be aware of the termination date of each lease and whether the tenant has the option to renew. If the leases are to terminate a month after closing, you should be prepared for the possibility of vacancies. Moreover, if the tenants have an option to renew, this may interfere with your plans to lease to other tenants. Occasionally, leases have options to purchase. This type of provision is problematic for any investor as the tenant would have the option to purchase the property after you closed. You would need to obtain a waiver from the tenant in this situation. This is why it is imperative to review each lease thoroughly with your attorney to make sure you know what you are getting into.
In summary, it is in your best interest as a real estate investor to carefully perform due diligence and review each lease carefully before purchasing an investment property.
The Coronavirus has caused financial strain across virtually every industry, and the real estate sector is no exception. While many laws have been passed in many states to protect tenants during these hard times, such as moratoriums on evictions, fewer laws have been passed to protect landlords, who have also suffered during this pandemic. Therefore, a common situation that landlords face is that their tenants are not paying rent, they cannot pay the mortgage and other carrying costs of the property, and they feel stuck because they have no recourse. Below are five considerations that landlords should be aware of if they face this situation.
In many states there are moratoriums on evictions, both residential and commercial. This means that landlords are not permitted to commence evictions during the moratorium period. However, landlords should realize that this moratorium typically has an expiration date. In Connecticut, the moratorium recently was extended to August 25, 2020. If this deadline is not extended again, landlords will be permitted to commence eviction actions, although it is unclear how long eviction lawsuits will take due to the backlog.
If a tenant is not paying the rent and you absolutely need the tenant to vacate (for example another paying tenant is ready to move in), a viable option to consider is offering the tenant money to move out, as opposed to waiting for the expiration of the moratorium period and then going through the eviction process. While it may be difficult to pay a defaulting tenant and waive the delinquent rent in order to motivate the tenant to vacate immediately, it is far less painful than having to wait until the moratorium expires and then pursue an eviction. This is a practical solution as the moratorium deadline may very well be extended again.
While many laws have been passed to protect tenants that are experiencing hardship, some laws have also been passed to protect landlords that are experiencing financial difficulties. For example, the Federal Housing Finance Agency has extended its foreclosure moratorium for single-family loans backed by Fannie Mae and Freddie Mac until August 31, 2020. Moreover, many states have also passed foreclosure moratoriums on other property classifications such as multi-family and commercial properties. Accordingly, your lender may be prohibited from instituting a foreclosure action if you are unable to make the mortgage payment.
In Connecticut, for example, there are many restrictions on foreclosures. Many banks and credit unions are participating in a mortgage relief program which requires a moratorium on new foreclosures through July 30th, along with 90-day grace periods (only residential properties). This date may be extended. Moreover, other restrictions have been imposed statewide on all foreclosures such as a moratorium on any foreclosure auctions taking place through August 22nd (which applies to foreclosures that began before the Covid-19 pandemic). For a complete list of orders and laws relating to foreclosure moratoriums and restrictions in Connecticut, please view the below links.
https://portal.ct.gov/DOB/Consumer/Consumer-Help/COVID-19-Mortgage-Relief
https://jud.ct.gov/COVID19.htm
https://portal.ct.gov/DOB/Consumer/Consumer-Help/COVID-19-Non-Federal-Mortgage-Help
Many lenders are more willing to negotiate work-outs and/or forbearance agreements during Covid-19. Therefore, if you are a landlord experiencing financial hardship, you may want to consider discussing a work-out or forbearance agreement with your lender.
While evictions may not be filed, a Landlord who wants to take an aggressive approach with a delinquent tenant may still file a lawsuit in Superior Court for damages, including back rent. However, many courts are closed, and cases are not moving quickly – but landlords are still permitted to file the lawsuit. Filing a lawsuit and getting in line to be heard can at least provide landlords some protection, or perhaps motivate a tenant to work out a payment plan if this is feasible. Of course, landlords should be cautious in using this aggressive strategy if a tenant is truly experiencing serious hardships resulting from the covid-19 pandemic.
The Covid-19 health crisis has changed everything for the foreseeable future. How we socialize. How we do business. How we interact with our family. And even how we purchase real estate. While I am confident that we will all get through this together and come out stronger, we can still carefully conduct business and do real estate deals while we social distance and quarantine. However, there are critical contract provisions that must be included in real estate contracts during this crisis to account for delays and contract performance hindered by the crisis. This clause is called force majeure clause (also known now as a Coronavirus clause) which accounts for what happens to the parties’ contractual obligations in the event of unforeseen events such as strike, war, or a pandemic such as the Coronavirus.
A force majeure / Coronavirus clause addresses the parties’ obligations in the event that events such as strike, war, or a pandemic such as the Coronavirus interfere with a contract. Sometimes, force majeure clauses do not include pandemics so it is essential to make sure that the clause specifically calls out the Coronavirus pandemic. A comprehensive Coronavirus clause will provide that the parties’ obligations to each other are reasonably delayed / postponed if the Coronavirus interferes with their obligations, and such obligations may be completely discharged if the parties are not able to close the deal due to the outbreak.
The Coronavirus can interfere with a real estate deals in various ways. A common and reoccurring problem is that the title searches and due diligence are delayed due to town hall closures or reduced hours. Accordingly, a title search, municipal search, or zoning due diligence could take significantly longer. It is a good idea to determine whether the town hall of the subject property is closed, has reduced hours, or whatever the case may be, so the parties can plan an appropriate closing date.
Moreover, if environmental testing is required for the deal, such could also be delayed due to the virus. Many companies have reduced staff and are working from home. Similarly, surveys could take longer to complete if required on a particular deal.
The Coronavirus is also causing banks to change their loan packages or even to withdraw certain loans altogether. Accordingly, mortgages may take longer to be approved and processed due to the virus.
These are just some of the ways that the virus is impacting real estate deals. Of course, coordinating the closing can be challenging as many law firms are closed and are doing their best to close through the mail, or using very limited office hours.
The Coronavirus clause protects both buyers and sellers, but they primarily protect buyers. Of course, sellers may have to obtain a payoff statement for existing mortgages, resolve title issues, or do repairs, all which could be impacted by the Coronavirus. However, the buyer is typically the party that has much more to do before closing, including inspections, due diligence on public records, obtain a mortgage, and so forth. Moreover, the buyer has a deposit to lose while the seller is not putting up earnest money. Accordingly, the Coronavirus clause protects both parties but primarily the buyer.
Not all Coronavirus clauses are the same and depending whether you are the buyer or seller, you will have slightly different objectives using a Coronavirus clause. As a buyer, you want very broad protection, which includes delaying dates and allowing the termination of the contract if the Coronavirus significantly interferes with the closing. A seller should also want to include the Coronavirus clause, but only to allow the reasonable delay of dates; not termination, so the buyer is locked into the deal. Accordingly, buyers and sellers have slightly different objectives when including such a clause, which is why it is important to retain a good lawyer to negotiate your interests in transactions during the Coronavirus pandemic.
A good Coronavirus provision will account for delays of the mortgage, inspection, due diligence, and any other contract dates, so typically you will not need a separate provision in the mortgage or inspection contingency clauses.
Yes. Force Majeure / Coronavirus clauses are not unique to real estate contracts and are important in other types of contracts. They may and should be used in any contract, including leases, management agreements, vendor agreements, buyouts, etc. However, as with real estate contracts, you may want a broader or narrower provision depending on which side of the table you are on. In summary, real estate deals can still occur during the Coronavirus pandemic. However, it is important to include a Coronavirus clause, be ready for possible delays, and be ready to close by mail, or possibly in masks and gloves at your lawyer’s office.
A “Triple Net Lease” is a type of lease that every investor should be familiar with, particularly investors who focus on commercial real estate. An investor who owns a commercial building may find him or herself negotiating a triple net lease with a prospective lessee. In fact, an owner should insist on a triple net lease as this type of lease is advantageous to the owner. Alternatively, an investor may be a lessee on a long-term triple net lease for land or a large building. Outlined below is a summary of a triple let lease along with three important things that all investors should know about this type of lease.
The triple net lease is a type of lease, typically used in commercial buildings, that places responsibility on the tenant for three expenses in addition to the rent. These three additional expenses are the building maintenance, insurance and property taxes. This arrangement is typically preferable for the landlord since the tenant(s) will help defer the expenses of the building. Below are a few important things every investor should know about these types of leases.
The taxes, maintenance, and insurance can go up or down each year. Clearly, as the landlord, you are more concerned about being protected if these expenses go up each year. Therefore, it is important, and also customary, to include a provision in the triple net lease that allows you to raise the Additional Rent (which is a common term for the triple net expenses of maintenance, insurance and taxes), which will allow you to raise the expenses that the tenants are responsible. For example, if your annual taxes are increased by the City, such a provision would allow you to raise the Additional Rent to account for the real estate tax increase. However, it is also customary for the Tenant to insist on a cap, or maximum, that such Additional Rent may be increased, so this may be a negotiation point at the outset of the lease. The take away is that all investors that use triple net leases should have a provision in their leases that protects them when the triple net expenses increase.
Common Area Maintenance Charges, or CAM charges, are utilized in triple net leases with multiple tenants. CAM Charges are one of the expenses in the Additional Rent charged to commercial tenants, and are composed of the tenants’ proportionate share of the work and maintenance performed in the common areas of the property. Each tenant is responsible for its pro rata share of the property’s total CAM charges, which is typically equal to the tenant’s rented square footage of the total, rentable square footage of the property.
A common example of a CAM charge is snow removal and salting for a shared parking lot. Since all the tenants and the customers and clients use the shared parking lot, it is a common maintenance expense, and all tenants will share the benefit in having a parking lot free from snow, ice, and other debris, and therefore share proportionately in this cost.
CAM Charges can include different things so it is important to understand them. Typically, CAM charges are defined in the Lease, but may or may not include items such as management service or HVAC repairs. All investors involved in triple net leases should understand that CAM charges may include different functions in addition to the standard snow removal, cleaning, and common area maintenance. As the landlord, it is beneficial to negotiate the management fees and HVAC repairs in CAM charges, if possible. As the tenant, clearly the opposite stance is in your best interest.
Moreover, CAM Charges can change from year to year so, as the Landlord, it is important to have a provision in the Lease that allows you to increase the CAM charges if the expenses increase.
A triple Net Lease is advantageous for a Landlord because it passes most of the maintenance and operating costs to the tenants. However, Landlords should also keep in mind that in most triple net leases, the Tenant has the right to review the Landlord’s financials relating to the taxes, insurance, and maintenance fees to make sure they are accurate and account for any reconciliations. Therefore, all owners of commercial properties with triple net leases with tenants should understand that they may need to allow the tenants to review their books from time to time.
Many investors have asked me a variety of questions concerning a clause that is common in mortgages and promissory notes called a “due-on-sale clause”. A due-on-sale clause is a clause in a mortgage and/or promissory note that provides that a default may be declared and the loan may be called due (repaid in full) upon sale or transfer of ownership of the property secured by the mortgage without the bank’s consent. In other words, the bank has the right to demand full payment of the note if the property is transferred without the bank’s permission (this does not include a traditional closing where the bank is paid off and the lien released at closing).
…you may need to transfer your investments… into a limited liability company (or companies).
Edward Schenkel
Why should a real estate investor understand be aware of the due-on-sale clause in a mortgage? For several reasons. First, as an investor, you will want to make sure you are protected by keeping the property in a limited liability company so you are shielded individually if there is a lawsuit. This means that you may need to transfer your investments, which are currently held in your name, into a limited liability company (or companies). If there is a due-on-sale clause, such transfer may technically violate the clause. Accordingly, you should be aware that if you transfer the properties in a company without the bank’s consent, there is a risk the bank could declare that this is an act of default and call the loan. However, this is low risk since the bank’s primary concern is receiving the monthly mortgage payment and that the property is not wasting away. Also, if the bank did complain, you could transfer it back. Still, to be safe, it is recommended you either purchase the property in a corporate entity or that you obtain the bank’s consent before transferring the property to your company, even if it is a sole member limited liability company where you are the sole member.
This means that you will have more bargaining power to discuss the terms you want in and out of the loan documents.
Edward Schenkel
Second, a good reason to understand the due-on-sale clause is so you can negotiate it out of future deals, or at least negotiate room to transfer to companies where you own an interest. As an investor progresses in his or her career, he or she may find a good deal that involves seller or alternative financing. This means that you will have more bargaining power to discuss the terms you want in and out of the loan documents. Being aware of this clause means that you can either take it out, allowing you to freely transfer the Property to your companies or partners, or draft a due-on-sale provision that is more flexible and suitable to your needs.
Commercial Real Estate can be a great investment. However, commercial deals are often more complicated than residential. Everything from the due diligence to the contracts are more involved. That is why any investor who is contemplating a commercial investment should understand all the nuances of these types of deal before getting started. This post will talk about some of the different types of real estate contact provisions in commercial deals that every investor should understand before getting started.
The clause must be carefully drafted… so it is important to consult with counsel before signing.
Edward Schenkel
Due Diligence is important in any real estate acquisition, residential or commercial. However, in commercial, due diligence encompasses many more things and is more complicated. Accordingly, it is essential that the due diligence provision in commercial contracts is drafted broadly to allow the investor to inspect more than just the physical condition of the property. An investor should be entitled to conduct due diligence on zoning, environmental (including phase 1 and phase 2 testing), tenant leases, owner contracts, and the financials of the property. The clause must be carefully drafted to allow you to get out of the deal if any of one these are not satisfactory so it is important to consult with counsel before signing.
…it is essential to have a contingency clause in the contract…
Edward Schenkel
Unlike residential acquisitions, you may have plans to add an addition to the commercial property, construct a new building on the parcel, or move a new anchor tenant to the property soon after the closing. These plans may require some sort of zoning permit from the City or Town for your plan to legally materialize. Accordingly, it is important to determine if such a permit is needed. If important to your investment, it is essential to have a contingency clause in the contract that makes it clear that the closing is contingent on obtaining the permit. If you do not include this clause, you may be obligated to purchase a property without the ability to bring your vision to reality.
…it is imperative to describe all financing sources in the contingency…
Edwards Schenkel
As with a residential deal, Commercial real estate contracts should have a financing contingency provision if financing will be used. However, financing contingency provisions in commercial deals may be more involved as there is creative and nontraditional financing often utilized in commercial deals that are not typically used in residential transactions. Therefore, it is important that the financing contingency in commercial deals is carefully drafted to reflect the particular financing that is being used. For example, if there is a combination of two private lenders combined with owner financing, it is imperative to describe all financing sources in the contingency so that the deal is expressly contingency on obtaining all of the necessary financing.
…a provision that entitles the buyer to estoppel certificates is imperative.
Edward Schenkel
A commercial deal will often involve the sale of the property with tenants in place. Accordingly, it is essential for the Buyer to confirm that the leases are in full force and effect; that there is no default on the lease payments; and that both the tenant and current owner are in compliance with the lease and there are no violations. Estoppel Certificates will allow the Buyer to close with an assurance that the tenants are not behind on the rent. Accordingly, a provision that entitles the Buyer to estoppel certificates is imperative.
The seller representation should be clear…
Edward Schenkel
Seller representations and warranties are important in any real estate transaction, but particularly in commercial because there are different issues involved such as potential environmental concerns and different zoning issues. The Seller representations should be clear, and specifically note whether they are to the best of Seller’s knowledge and which representations survive closing. Common Seller representations and warranties include that the property is in compliance with the zoning and building regulations; that there are is no environmental contamination; that the leases, contracts, and financials provided to the Buyer are complete and accurate; and that the Seller (if a company) has the authority to enter into the contract.
In summary, commercial real estate can be a great investment but it is important to know all of the different issues before signing a contract for a commercial deal. Please ask any questions you here about commercial real estate contracts.
