Commercial Real Property Blueprint - Part 2: The Closing Agenda and Due Diligence

Commercial Real Property Blueprint:

Part 2 – The Closing Agenda and Due Diligence

Once a commercial real estate purchase and sale agreement is agreed to and executed by the parties, the transaction enters into what is called the Due Diligence phase. This is the opportunity and timeframe for the Buyer to “kick the tires” and confirm whether they are getting (or not getting) the value property they contracted for and also provides the ability for buyer to terminate the agreement based on their findings.

THE CLOSING AGENDA:

When a lender is involved, lender’s counsel will prepare what’s called a Closing Agenda or closing checklist. For a cash deal, the Seller’s counsel will usually draft this. The Closing Agenda is based off the commitment letter and/or purchase contract and details the closing requirements specifically and assigns responsibility to the parties involved to produce such documentation.

In addition, the Closing Agenda includes any and all Due Diligence required by Lender (or the parties) to satisfy the terms of the loan and/or purchase agreement. The Closing Agenda also typically lists all documents, which will be executed at the closing.

DUE DILIGENCE:

Typically, Due Diligence consists of a physical inspection of the subject property as well as the organizational validity of the entity taking title to the property and/or obtaining the financing.

The physical due diligence consists of items like environmental reports, surveys, appraisals, engineering and structural reports and inspections, zoning, permitting, certificates of occupancy, current tenant information and copies of leases. When conducting this form of due diligence it is important for a buyer/borrower to have a work group in place and timeline set for conducting and gathering this information prior to signing the purchase contract. This way, once you are bound by the agreement, you can hit the ground running and decrease the chance for delaying the transaction.

As for the organizational aspect of Due Diligence, this is part of the vetting process for both the Lender (if financing) and the Seller. Depending on the size and nature of the transaction, Buyer will have to provide a certified copy of all organizational documents for the entity taking title to the property (e.g. LLC, Limited Partnership, Corporation). These documents include certificates of authority for the entity to take any action associated with the transaction, as well as certifying how the entity is governed. Additionally, the Lender’s counsel and Seller’s counsel will always request proof of Good Standing with the Secretary of State and the Department of Revenue as well as proof that the Buyer (and Lender) and the property will be fully insured.

Whether you are a potential commercial buyer, seller/developer or commercial real estate broker, commercial transactions can be complex and the smallest oversight can cause a major set back.

If you have any questions about commercial real estate, commercial transactions, or would like to speak with a qualified real estate and business law attorney, you can contact our law firm at (203) 651-5521, or if you would like to learn more about our firm, click here to visit our website.