Commercial

Due Diligence Checklist

Mon, 16 May 2011 04:26:56 +0100

With my experience in dealing with Real Estate I have compiled a list of things to consider as part of your checklist before acquiring a commercial lease. Please feel free to contact me if you have any specific questions.

Preliminary due diligence checklist:

• Financial records:
◦ Annual profit and loss statements (P&Ls) past 3 years minimum (5 years preferred)
◦ At least one year monthly P&Ls (preferably two years)
◦ Balance sheet (3 years)
◦ Rent Roll including term, deposit, and payment history

• Tax returns- 3 years   
• Insurance: Insurance Policy; including all riders, risk assessments, and disclosure affidavit for carrier   
• All Existing Loan Documents: including notes, deeds of trust, closing statements, title policy, rate riders, etc., and contact names and numbers.   
• Deed   
• All Leases: entire copies plus any addendum or riders.   
• Any service or advertising contracts: (Trash, extermination, maintenance, management, commission agreements, union agreements, vending, billboard, pay telephone, etc. and any instrument or contract to be assumed by Purchaser)   
• Copies of all recent appraisals, engineering reports, environmental reports   
• Survey (as-built), legal description, architectural and engineering plans and specifications   
• Payroll register: List of employees including name, position, wage rate, and entitled benefits   
• Business license   
• Physical inventory of furniture, fixtures, and equipment, and supplies.   
• Utility bills: Water, Sewer, Gas, Electric (at least two years of monthly statements) (or recap report from provider showing usage and cost)   
• Bank statements showing deposits for last twelve months (optional)   
• Phone system documents (y2k compliance letters)   
• Computer systems (y2k compliance letters)   
• Fire System inspection reports and y2k compliance   
• Property Tax tickets for the past three years (real estate and personal)   
• Litigation History: details of any past or pending litigation (if none, then affidavit from owner)

Comprehensive due diligence: pre-closing

• Engineering Inspection and Survey   
• Environmental Inspection and Survey: Key Issues: Asbestos, Lead Paint, underground tanks, wetlands   
• Environmental Phase One: An Environmental Phase One (1) Assessment is an inquiry conducted to determine the environmental status of a property or facility in connection with a real estate property transaction. It follows standards which includes those published by ASTM.   
• Environmental Phase Two: Assessments/Subsurface Investigations: These projects include but are not limited to subsurface drilling and sampling, monitoring well installation and sampling, ground penetrating radar, and asbestos and lead sampling.   
• LUST survey- leaking underground storage tanks   
• Financial Audit   
• Title Search and policy   
• Property tax verification   
• Tenant Estoppel Letters   
• Mortgagee Estoppel letters   
• Legal Verifications: licenses, permits, zoning

Commercial Real Estate Checklist

Mon, 16 May 2011 04:23:02 +0100

Purchasing commercial real estate can be tricky, but having a checklist beforehand can be really helpful, so that you don't forget anything. There are some documents that are not necessary, but are still beneficial to the buyer and the seller. Carry a checklist with you beforehand to ensure that everything is put together properly and is in order.  
Precontract

Precontracts are a smart choice for both residential and commercial real estate. A precontract is simply a description of a contractual agreement that is not yet in place. In a way, a precontract is like a plan of action, as well as a promise for an agreement before the agreement has actually been implemented. A precontract ensures that the buyer (or investor) has everything on track and that they will see a return on their investment. The precontract outlines the promise of the agreement before the agreement has actually taken place. This is especially beneficial to someone who is putting down earnest money or who is promising verbally to go through with a purchase, but has not actually filed out the paperwork. For example, a seller may have three interested buyers, but may decide on one individual because she is paying a higher price than the other two. The precontract is put into place to say that the buyer is promising to make the purchase within a certain amount of time for a certain amount of money. That way, the seller has some assurance that the deal will go through.  
Prepared Affidavit and Memorandum Agreement

The Affidavit and Memorandum Agreement is usually a simple statement that the involved parties have entered a written agreement over the property. It can be a blank form that is filled in by hand. The form is an extra step, but it is helpful in case the actual agreement or document is lost. It can also be used to outline all of the paperwork that was filled out and agreed upon by all parties. The Affidavit and Memorandum Agreement usually lists the state and county that the agreement will take place in and discusses the commercial purchase and sale of the property and/or related business or supplies. The agreement is a short agreement and is signed and dated by all parties. An affidavit should be signed by a notary, which means all involved parties and the witness should meet at the notary's office, bringing their identification cards. There may be a small fee for getting the document notarized.  
Prepared Earnest Money Escrow Agreement

If earnest money is being put down, an agreement should be drawn up beforehand. Earnest money is an agreed-upon amount of money that the buyer will give to the seller (usually put into an escrow account until the sale is completed). If the agreement is not concluded satisfactorily, the seller usually has the right to keep the earnest money. The best way to describe earnest money is that it is a good faith deposit. An Earnest Money Escrow Agreement outlines how much earnest money is being put down, why and how the money is to be used.  
Commercial Real Estate/Business Agreement

Finally, put the entire agreement in writing in a formal purchase agreement. This is the final agreement (on paper) that the buyer and seller enter into and which will seal the deal and make the purchase final. After this paperwork has been completed and payment has been made in full, the buyer can take over the business property and the seller has completed the sale. If making a commercial real estate purchase which includes some type of business or materials, make sure that the purchase agreement lists all assets that are part of the sale. That way, you will not find yourself in the position of expecting to buy, for example, a complete motorcycle repair shop with all current business contacts, equipment and stock and end up owning only an empty building. The business agreement will vary according to what the buyer and seller agree on, but should be looked over by a real estate lawyer or experienced broker.  

10 Things You Need to Know Before Signing a Commercial Lease

Wed, 11 May 2011 01:32:25 +0100

So you've selected your location, negotiated your rent and are ready to sign that lease. Before you do, here's what you should know:
1. Read it. Yes, you do need to read it. I know, it's a very long (and face it, not very interesting) document, but you do need to know what it is in it. Check the terms. Do not assume they got it right. Make sure you check the start date, end date, rent, rent escalation and any other special terms you negotiated for. Also, be sure you know what you are obligated to do. What is the landlord obligated to do? Can you terminate it? Make sure you know what you are getting into.
2. Negotiate. Just because they gave you a lease, does not mean your negotiation is over. Many of the terms in the lease are still negotiable. When you're reading it, make a list of all the provisions you don't like and send it to your landlord. You may be surprised by how much they are willing to change.
3. Get your business legal structure in place before you sign. If you want to be protected by that corporate shell, make sure it's in place first. Be sure you have your filed Articles of Incorporation or Organization (some states call these documents Certificates) back from the Secretary of State before you sign.
4. Know the leasing terminology. For example, most leases use the term "CAM" which stands for "Common Area Maintenance". You should be allocated a percentage of the CAM you are responsible for based on the percentage of the building you are renting. Be sure the percentage is based upon the size of the building and does not vary based on how much of the building is rented.
5. Consider asking for a CAM Stop lease. Most leases these days are "triple net" (meaning you pay rent, plus your proportionate share of CAM and property taxes for the property). You can ask the landlord for a CAM Stop lease, meaning that you only pay for the increase in CAM and property taxes above your initial lease year (frequently called the "base year"). While the landlord may increase your base rental rate, it takes a lot of the "mystery fee" out of the rent. Alternatively, ask for a cap on the CAM so it cannot increase by more than a certain negotiated percent.
6. Read the CAM definition. This is probably one of the most confusing sections of the lease and you will be surprised by how much you are paying for. Check to make sure you are not paying for things that relate to the landlord's marketing efforts or legal fees associated with negotiating other leases. Other things you may want to strike are any administration fees of more than 3%, paying for benefits for thel andlord's employees, build-out costs for other lease units.
7. Understand your responsibility for capital expenditures. "Capital Expenditures" when used in a commercial lease typically refer to major structural expenditures, i.e. roof, foundation, HVAC (heating, ventilation, air conditioning) and other major repairs/replacements. What is "standard" is different from town to town and property to property, but I typically advise clients against signing any lease that shifts the burden of these repair or replacement costs to the tenant. If your landlord is requiring you pay for these costs, there are compromises. For example, if the lease says you are responsible for HVAC repair and replacement, suggest to the landlord that he strike "replacement" and that your repair obligation be limited to a maintenance contract, maybe two times per year, and that you be responsible for all general repairs up to a certain annual maximum amount.
8. Is the lease assignable? Check to see if the landlord has the right to terminate the lease in the event you ask for an assignment; that is, for someone else to take on the lease if you sell the business. For many businesses, your location is a big piece of the its value. If the landlord has the right to terminate the lease once you ask for an assignment, that could kill your sale. Ask the landlord to remove this provision or allow it be modified so it does not apply in the event of a sale of your business. Understand that the landlord will still want the right to reject the assignment if the new tenant is not financially acceptable.
9. Plan to provide a guaranty. If you can get away with signing a lease with no personal guaranty, you are extremely lucky. Most landlords these days will not sign unless you personally guaranty the lease. But guarantees are negotiable. Consider providing a guaranty for only a portion of the lease term, say half. Or negotiate for a guaranty that lasts only 6 to 12 months after you terminate rather than the remainder of the lease term.
10. Be realistic. If your lease constitutes 3% of a larger property, the landlord will be much more unlikely to negotiate with you than if your space is 25% or more. To truly understand what items are important to negotiate, consider hiring a lawyer to review the document and help you with the negotiations. Your lease may seem incredibly one sided and burdensome, but there are some very good reasons for many of those provisions and an attorney can help you decide when to cut and run and when the risk is worth it.