The Buyer’s Checklist to Buying Commercial Real Estate in California

By : Tamara B. Pow, Esq.

Although each of these topics can be expanded on extensively, this is a good overview of the steps you should consider as a buyer of commercial real property in California. Your broker should help you obtain needed items and a real estate attorney can review them to make sure you are protected from the many potential risks in any transaction.

1) Find a Real Estate Broker & Enter into a Brokerage Agreement

  • Find a Real Estate Broker licensed in CA
  • The Broker should be well-versed in the type of property and location the buyer intends to buy
  • The Broker has a satisfactory history of real estate transactions
  • Make sure the scope and representation of the Broker is clear in writing (CA. Civ. Code §§2079.13)
  • Who pays the Broker (Seller/Buyer?) (in CA each party usually pays their own broker)
  • Determine the terms of the transaction (see brokerage agreement blog )

2) Due Diligence

Getting the deal started – either with or without a letter of intent:

  • Arrange meetings with Seller to receive all documents and information about the property.
  • Buyer sends due diligence list to Seller
  • Determine the scope of the due diligence including: length, budget, physical inspections testing

Establish funding/lending & Inspections

  • Buyer does property inspections
  • Title search, and chain of title, including: current ALTA/NSPS Land Title Survey, vesting deed, reciprocal easement agreements, covenants, conditions, and restrictions, easements, and deed restrictions that affect the property’s development and redevelopment, use, operation, maintenance, and access. (Usually reviewed by real estate counsel.)
  • Check entitlements for real property including: variances, conditional use permits, costal development permits (if location is by coast), shoreline development or use permits issued by local agencies, compliance with CA environmental Quality Act (CEQA), check California Land Conversation Act of 1965, check any local unreinforced masonry (URM) ordinances
  • Zoning confirmation letter

Paperwork

  • Get copies of agreements that are binding on the property; including: Joint venture agreements, organizational documents, good standing certificates, certificates of statue, consents, loan documents, guaranties, 3rd party property agreements, leases, occupancy agreements, tenant estoppel certificate, licenses, and services contracts
  • Tenant Estoppel certificates, subordination, non-disturbance, and attornment agreements

Financial/Tax

  • Get copies of financial records; including: rent rolls, appraisals; financial statements, budgets, tax bills, tax returns, and assessment notes
  • Check tax impacts that will result from the acquisition of real property

Permits

  • Permits including: certificates of occupancy, building permits, and liquor license
  • 3rd party approvals or consents

3) Purchase and Sale Agreement

Entity-Who is buying the property (Example: LLC, LP, Tenancy in common or Corporation or multiple parties as tenants in common)

Review the purchase and sale agreement (Broker form or Attorney Drafted)

  • Sale price, financing, 3rd party approvals or consents, leases…
  • Pre-closing terms (conditions, covenants, due diligence, closing deliveries),
  • Post-closing terms (escrow, holdbacks, adjustments)

Special Considerations for CA

  • State statutory disclosures: natural hazards, electrical usage, hazardous substances
  • “As-is” clause (Civil Code § 1542 release)
  • Liquidated damages
  • Warranties
  • Broker’s fee clause
  • Allocation of city and county transfer taxes
  • Independent considerations clause

Contingencies

  • Contingencies: subdivision of property, financing, entitlements, conditional use permits, 3rd party approvals or consents, any other items of concern.

Closing

  • Scheduled date for closing, documents are exhibits
  • Consider maturity date of any financing commitment, any 1031 exchange deadlines, buyer’s loan financing

Restrictions

  • Seller’s right to continue to manage and operate property before closing (new leases, property agreements, and service contracts)
  • Local law

4) Pre-Closing

Between signature of the Purchase and Sale Agreement and before closing

Complying to agreement

  • Liens
  • Statues/regulations compliance
  • 3rd party consents
  • Contingencies, and objection letters
  • Any internal entity matters are completed before closing
  • Make sure the necessary consents, waivers, estoppels and other notices are complied with before closing. (tenants, or other property related agreements)

Finance – review and approve loan documents

  • Escrow – CA uses escrow for closing
  • Get all legal property documents in order

Buyer name (Who is signing?)

  • If it is an entity buying the property – ensure entity is in conformity with CA and registered with Secretary of State and ask escrow if you need to obtain a good standing certificate.
  • Any internal entity matters are completed before closing
  • Deliver organization and authority documents to the title company and lender for approval before the closing

5) Closing

Organization

  • Have a calendar of important dates or expirations of contingency periods
  • Review documents: rent, utility charges, taxes, contracts, operating expenses, leasing brokerage commissions, tenant improvement allowances, deposits, attorney fees, insurance
  • Tenant notice letters
  • CA form 593-C
  • Track documents and deadlines; including: utility reading before cut-off time, inventories, cut-off times for sending money wires, receipt of property files and other related files, keys, passcodes, assumed service contracts, and receipt of any estoppel or SNDAs

Disbursements

  • Title costs and escrow fees based on the final bill prepared by the title company and escrow holder, survey costs, real estate taxes and assessments, utility charges, attorney fees, insurance premiums, brokers fees, due diligence fees
  • Include payoff amount of Seller’s existing debt, deposits on the closing statement, and amounts that Buyer’s lender will fund at closing

Title

  • Check the deed
  • Check the transfer tax declaration and PCOR
  • Check with county recorder that closing documents are recorded
  • Confirm the list of documents required by the title company, Seller, and lender
  • Ensure the person buying (if an entity) is in good standing
  • Check good standing certificate or a certificate of status, organizational documents
  • If it is a foreign entity- confirm it is qualified to do business in California
  • Have consents or resolutions authorizing the transactions
  • Title insurance endorsements

Get all required parties to sign

7) Post-closing

  • Have a calendar to track dates; including: Receipt of final title insurance policy, final survey, recorded documents, expiration of any post-closing indemnity periods, and release of any escrow funds
  • Ensure all payments are made, with a receipt marked ‘paid’
  • Ensure notice to tenants and service contract providers are delivered promptly after closing

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

The Brokerage Agreement – What To Look Out For?

By: Tamara B. Pow, Esq .

When buying a commercial real estate property, the brokerage agreement is the agreement between you (the buyer) and your broker. For the buyer, it is in your best interest to get this agreement in writing, and have it reviewed by a real estate attorney to ensure the best outcome and to have a document that states each parties duties but doesn’t give the broker more than is necessary. For the broker it is required to get the agreement in writing in order to receive the brokerage fee. Any transaction that involves real estate must be in writing to be legally binding. (Cal. Civ. Code §1624(d)).

The broker is an agent of the buyer or seller. An agent simply means that the broker can act on behalf of their client – the buyer or seller. (Cal. Civ. Code §2079.13). Sometimes the broker could act as a dual agent, meaning the broker represents both seller and buyer. If this occurs, be sure to read the brokerage agreement thoroughly to ensure the broker will represent your interest in the transaction. It is advisable to hire a real estate attorney to represent you if your broker is a dual agent.

The benefit of the brokerage agreement is a clear communication between the buyer and the broker. It is a great opportunity to discuss who will perform what tasks. Some tasks to discuss include:

  • Time limitations or expectations of tasks to be completed.
  • How and when the broker will be paid?
  • What kinds of expenses the broker and the client will pay and what will the cap be on these expenses?
  • When will the broker’s representation end?
  • Will the broker be a party to another transaction after the sale is complete? For example leasing the property or finding tenants after the transaction.
  • The attentiveness of the broker and response to notifying the client on progress of the transaction.
  • Indemnification – the broker will seek to be indemnified from the clients acts and as the client you should check that you will not be held responsible for the broker’s act. Because this is an agency relationship, it is important as the client to communicate clearly to the broker on what representations or statements the broker can make on your behalf as buyer or seller.
  • Documents – Who will retrieve any documents that would disclose defects, title validity, improvements, zoning, or environmental issues of the property?

If a disagreement arises between the broker and the client, and the client wants to change brokers, it is best to revoke or terminate the past brokerage agreement before signing a new brokerage agreement. This way there is clarity regarding which broker is representing the party. Failing to do this could result in you having to pay a commission to more than one broker on the same transaction.

The brokerage agreement is a formal agreement between the buyer/seller and the broker. If any dispute should arise between these two parties, this agreement will be the source to understand which duty each party had in the agreement. A real estate attorney can assist you in reviewing and revising the broker’s form, which could otherwise favor the broker to your detriment.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

Negative Covenants in Loan Agreements – Think Through What You Really Want To Add

By: Serge Filatov, Esq.

When documenting a loan, lenders often have to determine which negative covenants they want to add to their loan agreement. Before determining which negative covenants to add, it is important to understand the purpose of negative covenants.

What Are Negative Covenants?

Negative Covenants are restrictions in a loan agreement which are inserted for the following reasons: (i) to help establish guidelines for business operation, (ii) assess continued creditworthiness, (iii) identify problems before an event of default occurs, and (iv) ensure that the borrower can repay its loans to the lender.

What are examples of Negative Covenants? Examples of commonly used negative covenants include the following:

Indebtedness Limitations . These provisions restrict the ability of the borrower to take on additional debt other than the loans made under the loan agreement. The purpose of such a covenant is to ensure that the borrower does not take on more debt than it can repay and to restrict the borrower from having other creditors who will compete for repayment.

Lien Limitations . These provisions restrict the borrower’s ability to encumber any of its assets other than the lien put on by the lender or other approved third parties. The provisions protect lenders against other creditors by restricting who can be a secured creditor.

Fundamental Change Limitations . These provisions restrict the borrower’s ability to enter into any transactions that fundamentally change the borrower’s business, such as mergers, sales of substantially all of the borrower’s assets or liquidations. The restrictions ensure that the borrower maintains the same business during the life of the loan and that the borrower does not incur indebtedness or become subject to liens as a result of a transaction such as a merger.

Material Agreement Change Limitations . These provisions often restrict the borrower from amending the terms of any material agreements, such as a sales contract with a significant customer or borrower’s underlying governing documents. The restrictions helps ensure borrower continues to maintain a business which is similar to the business that existed at the time when the lender made its credit decision about the borrower.

Sale of Asset Limitations . These provisions restrict the borrower’s ability to sell, transfer or dispose of its assets outside of the ordinary course of its business. The restrictions ensure that the borrower’s assets remain substantially the same during the life of the loan. This is especially important for loans which are collateralized by the borrower’s assets.

Equity Payment Limitations . These provisions restrict the borrower from making payments to its equity holders, for example including making any distributions and equity redemptions or repurchases of the borrower’s equity. The restrictions ensure that the borrower will repay the lender prior to making payments to its equity holders.

Investment Limitations . These provisions restrict the borrower’s ability to make investments, including any loans, advances, equity purchases, note purchases, and asset acquisitions. The restrictions help ensure that the borrower will use its cash to pay down its debt to the lender rather than using it for investments.

Affiliate Transaction Limitations . These provisions restrict the borrower from entering into transactions with affiliates, or require that any such transactions are at least on an arm’s length basis and on terms no less favorable to the borrower than it could obtain if the transaction was with a third party. The restrictions help ensure that the borrower does not transfer its assets to a party which is not part of the loan and also ensures that the borrower does not enter into sweetheart deals which are not favorable to it.

Capital Expenditure Limitations . These provisions restrict the borrower from making capital expenditures, usually not exceeding a certain amount in any fiscal year. Since the funds used to make the capital expenditures could otherwise be used to repay the loan, lenders often put in restrictions to limit cash flowing out of the borrower.

Prepayment Limitations . These provisions often restrict the borrower from prepaying its loan early. Sometimes prepayments are not allowed at all while other times lenders will allow prepayments but will add prepayment penalties if a borrower tries to repay principal early. These restrictions help ensure that the lender will meet certain earnings targets on the loan.

Material Adverse Effect Limitations . These provisions often are used as default triggers so that if a borrower suffers any change which could cause a material adverse effect to its business, it is automatically in default under the loan. The provisions are often broad and provides the lender a catch-all provision to use in a problem loan scenario.

The above list of negative covenants is just a sample of the various restrictions that can be used to protect a lender. Additionally, each of these covenants can be written with exceptions and carve outs to accommodate a borrower based on a borrower’s unique situation.

If you are an institutional lender, don’t just rely on “stock” covenants. If you are a private lender, think hard about whether you want to add covenants to your loan. Either way, carefully consider what restrictions you want to put on the borrower based on the borrower’s risk profile and use restrictions that work for the specific deal.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

Tamara Has Received the YWCA Silicon Valley Tribute to Women Award

Tamara has been honored with the 2018 YWCA Silicon Valley Tribute to Women Award. Click here to view the press release . Congratulations to Tamara!