At Schultz Financial Group (SFG), we view wealth differently through our Four Capital approach. Our team works with you to build your wealth across Four Capitals – Financial Matters, Physical Well-being, Intellectual Engagement, and Psychological Space. This Financial Matters article focuses on non-pandemic issues for commercial real estate and business owners.
The world of commercial real estate is constantly changing, especially in today’s current climate. The new issues rising have affected transactions such as Purchase and Sale Agreements (PSA’s) and the relationship between buyers and sellers. To obtain a better understanding of the recent updates, SFG interviewed an attorney from the commercial law firm, Guild, Gallagher & Fuller, Ltd. in Reno, NV. The broad-based civil practice was formed in the early 1950s and has provided legal services for publicly traded companies, businesses, and individuals ever since.
We spoke to Gary Fuller who is a senior partner with the firm. He focuses on general business transactions, as well as real estate and estate planning. Fuller has been practicing law since 1985.
We turned to Fuller for more information about the current issues with commercial real estate.
What issues are currently at the forefront of commercial real estate?
The local real estate market in Reno, Nevada saw increased leasing and steady sales activity in the fourth quarter of 2020. Contributing factors appear to be the continued decline in regional unemployment, the steady influx of new residents to the region, and positive economic prospects.
As commercial leasing and sales increase in this market, it is important that transactions be properly structured and documented.
Form leases and purchase agreements often do not provide adequate protection for either party to the transaction. There is no substitute for negotiated agreements prepared by experienced professionals. It is critical that those agreements address liability exposure, insurance, environmental issues, and indemnification obligations.
Both sellers and buyers should have qualified representation from the beginning of the transaction. Even before the PSA, it is advantageous to have counsel involved at the letter of intent stage. Even if most Letters of Intent (LOI) are non-binding, it becomes the basis or roadmap for the PSA. Often, in addition, it is advantageous for LOIs to include binding provisions related to exclusivity and non-disclosure.
What Should Commercial Property Purchase and Sale Agreement Address?
The PSA is the most important document in the real estate transaction. It governs the transaction details:
- money and documents changing hands;
- timeline for buyer’s inspections of documents and property;
- representations and warranties;
- proration of income and expenses;
- timeline/procedures for closing;
- remedies in event of a party’s default (such as refund or forfeiture of deposit).
For buyers, the most important issues in purchase and sale transactions are:
a. Adequate due diligence inspections (the process is transaction dependent and varies greatly.)
- Timing-With the increase in construction activity in the region, it is critical that the PSA affords buyers sufficient time for contractors to complete physical inspections, environmental inspections, and surveys (to identify encroachments/easements, etc.).
- Physical inspections are crucial to identify needed repairs, costs, and status of ADA compliance. Adequate due diligence inspections identify risks and limits post-closing surprises.
- For investment assets, information on leases and tenants is critical for determining cash flow and expected return on investment.
- The Buyer’s lender may also be involved or interested in the due diligence process and will also require an appraisal.
b. Appropriate contingencies.
Buyers need appropriate contingencies for due diligence documents and property review/inspections, income/expense, lease, and estoppel certif. approval, title, and lender underwriting and appraisal.
c. Evaluation of title issues.
Title review is critical in discovering title issues, encumbrances, and easements that affect the title to and use of the property. An attorney’s review and working with the title company is critical to obtaining the best title insurance possible for the property.
d. Adequate Seller’s Representations and Warranties:
Because some issues are only known to the seller and not easily discovered, it is advantageous to the buyer for the seller to make as many representations and warranties as possible regarding the property and its condition and the condition of improvements/buildings (environmental issues, zoning, threats of litigation, violations of law or code) and for those representations and warranties to survive after the closing for as long as possible.
For Sellers, it is most advantageous for the PSA to provide:
- that the property is being sold “As-Is”;
- provide that the buyer conducts its own inspections or rely exclusively on its own investigations;
- contain a comprehensive release of claims against the Seller;
- contain as few representations and warranties regarding the property as possible;
- limit the contingencies to closing; and
- close as quickly as possible.
With an improvement in the market, sellers have increased leverage to exact favorable terms from buyers.
These issues underscore the need for legal representation in such transactions.
The world of commercial real estate will continue to evolve as there are constantly new developments. If you are entering a PSA transaction, whether you are the buyer or the seller, be sure to consider the issues at large from both perspectives and conduct adequate due diligence.
Schultz Financial Group Inc. (SFG) is a wealth management firm located in Reno, NV. Our approach to wealth management is different from many other wealth managers, financial advisors, and financial planners. Our team of fee-only fiduciaries strives to help our clients build their wealth across four capitals: Financial Matters, Physical Well-being, Psychological Space, and Intellectual Engagement. We provide family office and wealth management services to clients located in Nevada, California, and other states. If you’d like more information, please check out our website or reach out to us via our contact page.