Commercial Real Estate

The Real Estate Investment Trust (REIT)

(primarily in the business of acquiring , managing, selling, and mostly entomg income producing real estate) Pros Avoids tax at the entity level No individual or entity can own more than 50% Cons

Tenancy-in-Common

(where each co tenant owns an undivided legal title in the entire co-tenancy realty with co-equal rights to possession and rents). Pros Cotenqnts actually have title to the property Not subject to tax at the entity level and doesn't have to file a tax return. Income, deductions, and taxes pass directly to the individuals. Cons Requires unanimous consent of all cotenants Because of the above usually con tenancy ends in a partition. Creditors can force a sale of cotenants share (buyer becomes new cotenant)

Exceptions to the SOF?

. Full performance 2. Admission in court or pleading

Standard Representations and Warranties

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Two policies in Title Commitments

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What are the requirements for a valid Purchase Agreement?

1 Must satisfy the statute of frauds - note or memorandum - Subscribe the parties to be charged (signed) - Identify parties to the agreement - Specify the price - Describe the property - Wetlands? - Recite reciprocal promises to buy and sell and - Contain all other essential terms of the agreement including financing terms and contingencies, if any

Common real estate entities

1) Sole Proprietorship 2) General Partnership 3) C Corp 4) Tenancy in Common 5) Limited Partnership 6) S Corp 7) LLC 8) Real Estate Investment Trust (REIT)

What is a performance bond?

A bond issued to one party of a contract as a guarantee against the failure of the other party to meet obligations specified in the contract. For example, a contractor may issue a bond to a client for whom a building is being constructed. If the contractor fails to construct the building according to the specifications laid out by the contract, the client is guaranteed compensation for any monetary loss.

Construction Liens

A claim made against a property by a contractor or other professional who has supplied labor or materials for work on that property. Construction liens are designed to protect professionals from the risk of not being paid for services rendered.

Power of sale

A clause commonly inserted in a mortgage and deed of trust that grants the creditor or trustee the right and authority, upon default in the payment of the debt, to advertise and sell the property at public auction, without resorting to a court for authorization to do so.

What is a No shop agreement?

A clause in an agreement between a seller and a potential buyer that bars the seller from soliciting a purchase proposal from any other party. This is binding.

Due on sale Clause

A due-on-sale clause is a clause in a loan or promissory note that stipulates that the full balance may be called due upon sale or transfer of ownership of the property used to secure the note. The lender has the right, but not the obligation, to call the note due in such a circumstance.

General Warranty Deed

A general warranty deed not only conveys to the grantee all of the grantor's interest in and title to the property but also guarantees that if the title is defective or has a "cloud" on it, such as a mortgage claim, tax lien, title claim, judgment, or mechanic's lien, the grantee may hold the grantor liable.

What is a mortgage?

A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan.

What is a Purchase Agreement

A purchase agreement is a type of legal document outlining the different conditions and terms that are related to the sale of goods. It creates a legally binding contract between the buyer and the seller.

Quit Claim Deed

A quitclaim deed is a legal document for transferring any ownership claim, interest, right or title a person or entity (the "grantor") may have in a property, such as a house, to someone else (the "grantee"). Unlike a warranty deed, which confirms that the grantor owns the title to the property, the quitclaim deed does not confirm the grantor's ownership interest in the property but simply states that if they do have an ownership claim, they agree to quit that claim.

What is a carve-out

A situation in which a parent company sells a minority share of a child company, usually in an IPO, while retaining the rest. The child company will have its own board of directors and financial statements, but will benefit from the parent company's resources and strategic support. Usually, the parent company will eventually sell the rest of the child company in the open market. also called partial spinoff. 2. To separate the value of a property from the value of income that the property generates. For example, if the owner of an oil field sells the rights to the oil for a period of time, the owner is separating the value of the land itself from the value of the oil.

Special Warranty Deed

A special warranty deed conveys the grantor's title to the grantee and promises to protect the grantee against title defects or claims asserted by the grantor and any persons whose right to assert a claim against the title arose during the period in which the grantor held title to the property. In a special warranty deed, the grantor guarantees to the grantee that the grantor has done nothing during the time he held title to the property that might in the future impair the grantee's title.

Straw Purchaser

A straw buyer is used when the real buyer cannot complete the transaction for some reason.

Non-recourse loans

A type of loan that is secured by collateral, which is usually property. If the borrower defaults, the issuer can seize the collateral, but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount. This is one instance where the borrower does not have personal liability for the loan.

Buying into an LLC rather than real property directly?

Advantages ○ Buyer gets interest in llc, and possibly good will ○ Seller gets to keep interest in the property through membership in the LLC Disadvantage ○ buyer might be getting more than he bargained for since the LLC my other things as well as have other debts.

What about buying an interest in LLC that owns a property?

Advantages- • Seller has valuable franchise / service Ks and if buyer buys membership interest in LLC it would retain all those as Ks as well (good will). • Seller may want to retain an interest in the property. Purchaser will just buy a membership interest (not all) in the LLC. Disadvantages- • LLC may have bad stuff too. Maybe its no good will, debt, or other issues.

Warranty Deed

An instrument that transfers real property from one person to another and in which the grantor promises that title is good and clear of any claims.A warranty deed provides the greatest protection to the purchaser because the grantor (seller) pledges or warrants that she legally owns the property and that there are no outstanding liens, mortgages, or other encumbrances against it. A warranty deed is also a guarantee of title, which means that the seller may be held liable for damages if the grantee (buyer) discovers the title is defective.

Coinsurance

An insurance policy provision under which the insurer and the insured share costs incurred after the deductible is met, according to a specific formula. 2. More generally, a sharing of risk between the insurer and the insured. also called copay.

Title Commitments

An insurance policy that insures a party against loss due to a defective title. A title policy also protects a buyer from the discovery of existing tax liens on a property, non-disclosed restrictions on the property's use, mistakes in the public recording of the exchange of ownership, and even fraud and forgery. The title insurance policy covers the purchaser for up to the amount that the property was purchased for.

Option to Purchase

An option is a contract to purchase the right for a certain time, by election, to purchase property at a stated price. An option may be a right to purchase property or require another to perform upon agreed-upon terms

Arbitration

Arbitration is a process for resolving disputes which is an alternative to litigation in court. It is one type of Alternative Dispute Resolution (ADR). Rather than filing a lawsuit, going to court and having the matter heard by a judge or jury, the disputing parties arrange for the services of a private arbitrator

What is Builders Risk insurance?

Builder's risk insurance covers a building or other type of structure while it is under construction. Many lenders will not provide financing for a project unless this type of coverage is in place. The policy provides protection from a loss resulting from fire, acts of vandalism, or wind damage. Other types of losses, such as flood, earthquake, or terrorism, may be added to the policy, if desired or needed. The building owner is usually responsible for buying builder's risk insurance. The contractor on the project may be added to the policy as a named insured. Under this type of policy, the building or structure itself is insured against loss. Any materials or supplies on the job site will also be covered while the policy is in force.

Conditions

Buyers will usually have conditions (I.e., getting required zoning)

Broker's commission

Earned by closing of the deal.

Endorsements

Endorsements are used to expand or otherwise modify the coverage of a title insurance policy on real property.

Two types of Warranty Deeds

General and Special

What are the Advantages of a LOI?

Getting deal points nailed down before you spend the time / money in drafting purchase / sale agreement.

Right to Convey

Grantor promises that they have the right to convey the property as of the day of the conveyance (I.e., a minor, retard, etc. Does not have the right to convey).

Further assurances

Grantor promises that they will perform all reasonable acts necessary to perfect title for their grantees

Warrant and defend.

Grantor promises that they will warrant and defend the title to the land and all of the fixtures against all lawful claims and demands. May include the duty to pay lawyer fees.

Encumbrances

Grantor's promise that there are no encumbrances against the grantor's title.

Certificate of members of LLC

LLC signs purchase agreement and indiv members are required to certify themselves and have personal liability for reps and warranties.

Closing Checklist

Lawyers are sure they know who is responsible for what and what date it must be on.

What is a Letter of Intent?

Letters of Intent are not legally binding like a contract to purchase. Instead, they spell out the general guidelines of your intent to purchase their property. Letters of Intent are standard in the purchase of commercial property where contracts are not standardized like residential real estate. They allow you to communicate the most important aspects of your offer and avoid the expense of a contact before you know if the Seller will accept your offer.

Zoning Improved Land

Like the endorsement covering zoning matters for unimproved land described above, this endorsement describes the zoning classification and permitted uses for improved property. In addition, however, this endorsement provides coverage against loss resulting from a court order prohibiting the insured use or compelling the removal or alteration of a structure or improvement on the land due to certain specified zoning violations, including floor space or setback requirements according to applicable law or regulation. This endorsement is available only on already improved property when a determination can be made regarding the zoning classification of the property, permitted uses of the property and any zoning restrictions as to building and building site size.

Survey Issues

Make sure there is always a public road access and the survey is accurate.

Representations / warranties of the seller

Marketable title and to provide any information required of buyer.

LLC Member Certification

Members of the llc must individually sign and certify that they have personal liability for warranties and representations.

Why would you want Mezzanine financing?

Mezzanine financing is advantageous because it is treated like equity on a company's balance sheet and may make it easier to obtain standard bank financing. To attract mezzanine financing, a company usually must demonstrate a track record in the industry with an established reputation and product, a history of profitability and a viable expansion plan for the business (e.g. expansions, acquisitions, IPO).

Types of Closing

Michigan uses NY style- All parties present and you sign the documents right there. It's Good bc you can settle all the issues then and there. o You also have Internet and lawyers only meet face to face to resolve issues. o You also have complete escrow closing

What are the types of brokers?

Most brokers insist on "exclusive agency." It entitles the broker to a commission if he or any other broker sells the property, but not if the property is sold through the efforts of the owner

Inspection period

Often buyer wants to be able to check to make sure he can use the property. Usually 60 days

S Corporation

Pros Avoids federal corporate income tax at the entity level Shareholders possess same freedom from liability as C Corporation shareholders Income, deductions, credits pass through to individuals. Attractive for ventures that will suffer large losses early, and profits later (shareholders get a deduction for the losses) Easily converted to a C Corporation Cons requires 75 or few natural person investors. Each shareholder is directly taxed for corp profits whether they are distributed or not.

Limited Partnership (LP)

Pros Limited liability Tax benefits of a partnership Cons Must have one general partner who has unlimited liability

Sole Proprietorship

Pros Simplicity No tax complications since it is not a distinct taxable entity. Cons Personal liability

General Partnership (GP)

Pros Tax treat - entity isn't taxed, and taxes, income, deductions pass through to the partners. Cons Each partner is %100 liable, but only due a percentage of the profit

Limited Liability Company (LLC)

Pros Treated as a partnership for tax purposes Limited liability Cons Many unsettled legal issues on how the law treats LLCs

C Corporation

Pros Entity totally distinct from shareholders Can our right own property Limited liability for entity debt for the investor who is a shareholder Protects the entities assets from creditors of the individual shareholders. Cons Negative tax treatment - double taxatiom corporation is subject to taxation Individual shareholder subject to taxation on dividends from the corporation.

What is the most important document of the transaction?

Purchase Agreement

Inspection Period

Purchaser wants to be sure it can use the property for the intended use. Takes a lot. Need zoning, permits, etc. Purchaser wants lengthy time for inspections. 60 days is common, but the purchaser wants an increased good faith deposit to extend period of time for inspection.

Seisin

Represents the grantors's promise that she owns what she purports to convey.

What is a Lease hold mortgage

Simply stated, a leasehold mortgage is a mortgage that is taken out on leased property. The mortgage takes second place to the owner of the property. The lien on the property is said to be in subordinate position to the owner's interest. It is common for larger financial institutions, such as insurance companies and larger banks, to hold a mortgage on leasehold estate properties, since leasehold mortgages are usually large and represent a higher classification of risk. Many commercial properties are built on leased land, and the owner is said to hold title in leasehold estate.

Specific Performance

Specific performance is an equitable remedy rather than a legal remedy, because it does not seek money damages. Rather, the appropriate court is asked to direct the defaulting seller to convey the property to the purchaser pursuant to the terms of the contract. The theory is that each piece of real property is unique, and a purchaser will have no adequate remedy unless he can obtain title to the property.

Closing Adjustments

Taxes, insurances. Cost or revenue item that comes in after the closing of the deal. So there is a period of time where these closing adjustments are made.

Undisclosed buyer

The buyer wishes to remain anonymous. The agent representing the buyer hereby declares that he/she has a written agreement from the buyer in which the buyer promises to be bound by the terms and conditions of this contract, if accepted.

Gap Coverage

The gap exception puts the buyer at risk for any title defects which appear of record after the effective date of the title insurance commitment and before the buyer's deed is recorded, i.e., the "gap period." Some of the title defects that may appear of record during the gap period include mortgages, deeds to third parties; lis pendens filings for foreclosures or other litigation, construction liens, federal tax liens and judgments. With coverage, the Title Company automatically liable for gap coverage.

Zoning Unimproved Land

This endorsement insures certain zoning matters as they relate to unimproved property. The endorsement specifies the zoning classification and the use(s) permitted for the property. Issuance of this coverage requires an examination of the applicable zoning ordinances and amendments to determine the particular zone and permitted uses of the real property covered by the title policy.

Access Zoning

This endorsement provides assurances to the insured that (a) the named street is a physically open public street, (b) that the property in question abuts the street and (c) that there is nothing to prohibit access from the property to the street.

Due-on-encumbrance Clause

This is a mortgage provision giving the lender the option to accelerate the debt if the borrower mortgages the real estate further without obtaining the consent of the lender. In other words, the due-on-encumbrance clause allows the mortgage holder to accelerate the mortgage note if the mortgagor places junior financing on the property.

Survey

This is how you know what you are buying. • Shows boundary • Certifies legal description • Easements • Chain of title • Due diligence • Property has markers (irons) • Permitted exceptions • Evidence of title

Quiet Enjoyment

This is the grantor's promise that no one with superior title will disrupt the grantee's title or possession of the property. To trigger this covenant the grantee must be physically or constructively evicted.

Legal Description

This may also have to describe the type of land. For instance, is it a wetland? This may reduce the purchase price base on the amount of wetland.

Closing adjustments

Time granted to allow for adjustment in cost, I.e. taxes and insurances.

Foreclosure

Two types. By Court action or advertisement.

Purchase Price

Usually has downpayment which is put into an escrow account where a third party holds it until either transaction fails or is consummated.

Down Payment

Usually placed in an escrow account.

Covenants

Warranty Deeds and Quit Claim Deeds

Are electronic signatures okay?

Yes.

Are straw purchases legal?

Yes.. The real buyer promises to make all the payments and may compensate the straw buyer for the use of his or her credit. Banks dislike the use of straw buyers because the arrangement increases the risk of default on the loan without the bank's prior knowledge of that risk.

What are the Disadvantages of a LOI?

You may create a duty to negotiate. May have a no shop clause.

1031 exchanges

a 1031 exchange is a real estate transaction involving the sale of one property with the tax on the capital gain deferred because of the qualified purchase of another like-kind property in exchange. For 1031 exchange purposes, the term like-kind property is interpreted as any type of investment property, rather than property owned for personal use. A delayed 1031 exchange, or Starker exchange, involves a purchase that closes within 180 days of the sale.

What is a broker?

a person who acts as an intermediary between sellers and buyers of real estate/real property and attempts to find sellers who wish to sell and buyers who wish to buy.

Foreclosure by advertisement

does not require court supervision. Lenders might choose a judicial foreclosure if there are defective mortgage documents, title defects, or if the lender anticipates litigation. Otherwise, foreclosure by advertisement is quicker, less expensive, and does not require judicial oversight.

Power of attorney

o Can execute with power of attorney. It has to be recorded at the time you execute the deed.

What is contained in a Letter of Intent?

o Financing o Closing date o Due diligence period o Earnest money deposit o Broker fees o Period of acceptance o Signatures o Conditions

Conveyances

o Made by deed and personal property by bill of sale. o Deed must be delivered and before notary. No witnessed in Michigan.

What if there is a foreign seller?

o Parties need to sign paper and transfer funds via escrow to pay any capital gains taxes applicable to the seller.

what about architects and engineers?

o They begin their work long before improvement begins. o But nobody knows o Some statutes can close gap by making notice.

Reinsurance

occurs when multiple insurance companies share risk by purchasing insurance policies from other insurers to limit the total loss the original insurer would experience in case of disaster. By spreading risk, an individual insurance company can take on clients whose coverage would be too great of a burden for the single insurance company to handle alone. When reinsurance occurs, the premium paid by the insured is typically shared by all of the insurance companies involved.

Foreclosure by court action

processed through the court system.

What is marketable title?

titles are evidence of ownership. Selling real estate (land and the property attached to it) involves transferring its title. A marketable title is one that can be transferred to a new owner without the likelihood that claims will be made on it by another party. Marketability of title is addressed in the contract for sale. Unless a contract for sale specifies that a third party has claims on the real estate, there is an implied provision that the seller has a good or marketable title, which the buyer will receive.

What can go wrong with a Construction loan?

• All kinds of things that can go wrong. • Project may not be completed on time. • Cost may go over budget. • Value may not be as much as projected. • Concerned abt liens filed by 3rd parties, which may have priority.

Closing opinions (of counsel)

• Confirmation of major reps and warranties • You know they are legit when the lawyer verifies them. • Assuring the due diligence of the other party's counsel. • Always going to state who you rep and what is the context of the opinion, what docs you review and what assumptions you make. • This typically goes to the lender. Lender wants it b/c it is getting a lot of documents and they want to be sure its valid, binding and enforceable against the seller.

Default

• Default under purchase agreement, purchaser has option to terminate and get return of good faith deposit back. • Seller's remedy is to get forfeiture of earnest money deposit. Escrow agent will forward money.

What can you do to mitigate these issues with Construction loans?

• Lots of due diligence by lenders to avoid / mitigate these probs. • Lenders retain their own consultant to ensure everything is reviewed. • Lenders want limitation on magnitude of change orders.

Terms of Purchase Agreement

• Parties • Legal description • Purchase price • Down payment. • Inspection period • Closing adjustments • Taxes, insurances. • Conditions • Certificate of members of LLC o standard reps and warranties. o These are heavily negotiated. • Closing documents • Default • Title commitments

Conditions

• Purchaser will have conditions of its obligation to close. • A common one is that it gets adequate zoning for the project. Sometimes the zoning at the time does not permit the project and the seller wants to make sure it will be changed or a variance will be granted.

Mezzanine financing.

• Somewhere btwn equity and mortgage lending. • Secured by an assignment of the membership interest in an LLC. The lender has no interest in the property but a lien on the membership interest. • Governed by the UCC, perfected by UCC. • Lender could become member of LLC if there is a default.

What are the problems with Cashier's checks.

• Written on Bank A deposited in Bank B and has to get back to Bank A before its paid. • Wire service is best. Its almost instant.

What are the advantages of a LOI?

● Gets the agreement nailed down before spending time and money on working on the purchase/sale agreement

Is a Purchase Agreement required for a real estate transaction?

● No. But there are many reasons given for the practice. - Just very common - Helps guard against foggines and inherent bias in memory - Memorializes the results of negotiation - Brokers insist so they can justify their commissions.

What are the disadvantages of a LOI?

● Possibly creates a duty to negotiate ● Often is packaged with a non-shopping agreement that is binding. ● Can become enforceable. How? - Reliance (under estopel) - Later oral agreement - Any provision in the letter may be waived by subsequent consent.

What's contained in Letters of Intent?

● Purchase price ● Financing ● Closing date

What is a Purchase Agreement?

● Written contract ● By the parties, grantor and grantee ● For the transfer of real property