04/23/2016 by heiseheisellp 1 Comment
Anatomy of a Commercial Real Estate Transaction
Why would anyone need a real estate attorney to handle the transfer of commercial real estate and business assets? Real estate attorneys are accustomed to coordinating and managing multiple responsibilities to ensure that a transaction closes in a timely fashion and fulfills the objectives of the parties. I was recently engaged to assist a client with a $3,800,000.00 purchase of a well-established operating business in Ocean City, Maryland, Nick’s Original House of Ribs. The stated goals of the parties were to transfer the commercial real estate and business assets from the seller to the buyer seamlessly with a minimum amount of disruption to the business and existing customers.
How is this type of transaction structured? For the initial step I drafted a letter of intent ("LOI") on behalf of the seller. An LOI is a summary of the key terms of an offer. It is where all the preliminary negotiations occurred as to price, financing terms, inspection, details of the due diligence period, and other main points of the transaction. Once the buyer and seller came to terms on the LOI, these terms were integrated into a detailed and comprehensive Contract of Sale ("Contract"). Contracts can range anywhere from five pages in a simple transaction to hundreds of pages in more complicated transactions. Multiple rounds of negotiation occurred in this matter before the parties agreed to a final Contract. The terms of the Contract were broadened to include provisions concerning the sale of furniture, fixtures and equipment, the transfer of a liquor license and non-compete restrictions.
Once the Contract was fully signed a series of events were put into motion that culminated in a successful settlement. As the real estate attorney I assumed a central role in identifying, engaging and coordinating the activities of the third parties who were to play a role in the transaction. These parties included: institutional and private lenders; insurance agents; title abstractors; settlement companies; IT professionals; attorneys; accountants, and surveyors. The activities of each of these parties required tight coordination and oversight to ensure that their work product was prepared and delivered in a timely fashion so as to meet all deadlines. If any of these parties missed a deadline the buyer and seller would have experienced delays, an interruption in the operation of the existing business and loss of income.
In addition to managing the activities of third parties, a real estate attorney frequently assumes the role of a problem solver. In large transactions such as this one, issues often arise during settlement preparations and the due diligence period that must be identified and remedied. For example, in this transaction the survey that was prepared revealed an unused alley that ran along one side of the property. While no permanent structures were built in the alley, this discovery resulted in the buyer purchasing less property than he had originally intended which led to further Contract negotiations. Additionally, an unreleased deed of trust was discovered in the chain of title and a remedy had to be crafted and negotiated with the institutional lender so that the transfer could occur without delay. These types of issues, while distressing, need not be fatal to a settlement schedule. A diligent real estate attorney can often identify issues early and work with the parties to prepare a solution in order to move the transaction to closure.
A real estate attorney will not only keep all these activities moving forward, but they will also prepare the majority of the documents to memorialize the transaction. Some of the documents such as the Bulk Transfer Sales Tax Return and Bill of Sale serve a dual purpose of documenting the sale and giving notice to the State thereby providing a clean exit from the business for the Seller. Where seller financing is being provided, buyer’s counsel may be tasked with preparing the documents to secure the lender such as a deed of trust, promissory note, assignment of rents and leases and other security instruments. Other documents cover actions and activities that go far beyond settlement. For example, a Non-Compete Agreement is a frequent component of this type of transaction as this document prevents a Seller from immediately opening a competing business. Additionally, in this matter, the liquor board’s calendar of hearings did not allow a liquor license transfer to occur prior to settlement, and so an interim management and escrow agreement was prepared. There are a myriad of other documents that may need to be drafted to cover the distinctive terms of a transfer.
When all of the parts of a transaction are managed properly, the culmination is a real estate settlement and personal property transfer occurring on the exact date anticipated by the parties. Here, all activities were managed so that there were no delays in the target settlement date. The Seller operated her business on a Monday evening, closed the business and conducted inventory on Tuesday, and settled on Wednesday. By Thursday, the restaurant was open and running under the new owner. By Saturday every table in the dining room of the establishment was full. The entire transaction took 90 days, the business continued operating without interruption throughout the entire process, and a seamless transition was made to the new owner. The end result was a very smooth transition and an exceptionally pleased client.