The Commercial Real Estate Process in California
Whether you are a buyer or a seller, certain phases of a commercial real estate transaction in California are the same, though each party’s interests may be quite different. A seller must decide to list a commercial property, and then an interested party must be attracted to it and decide to investigate and hopefully acquire it. After a buyer appears on the scene, the most important phases include:
The Letter of Intent
A letter of intent (LOI), which might also be called a memorandum of understanding (MOU), is sort of a preliminary meeting of the minds. A buyer finds a property matching his or her needs and wishes to pursue the matter, so an LOI is prepared. This is a brief, nonbinding document, which addresses major points of interest and concerns that will be negotiated over an agreed-upon period of time resulting in the final Purchase and Sale Agreement (PSA). After receiving the LOI, the seller may agree to move forward or just move on.
The Purchase and Sale Agreement
Abbreviated as PSA, this is the most important document in the entire transaction. The PSA will cover:
- How the money and documents involved will change hands between buyer and seller
- The timeline the buyer has to inspect the property and documents pertaining to it
- The representations and warranties each party makes to the other
- The covenants the parties agree to perform
- The timeline and procedure for closing the deal
- Provisions in case of default
- Other details important to the buyer or seller or both
How due diligence will be conducted depends largely on the property, but the seller will be required to provide the buyer with copies of all relevant documents, including existing leases, operating statements, prior environmental reports and surveys, and the like.
The buyer should also commission a detailed physical inspection of the property to verify the operating conditions of interior systems, including electrical, plumbing and heating, and air conditioning. An Americans with Disabilities Act (ADA) compliance audit may also be necessary, among other inspections and verifications. An environmental site assessment, commonly called “Phase 1,” should also be done to determine any environmental hazards.
What Can Go Wrong?
The answer, in short, is plenty. A buyer can misjudge the market and overpay, or go too far into debt to obtain the property of his or her dreams. A buyer can also misjudge the tax and upkeep consequences of the property being sought. A seller can be misled into overestimating the financial resources of the buyer or can ruin the deal by having unrealistic expectations of what the property is worth.
However, perhaps the biggest trap of all is not getting everything in writing from the start. If you agree to major aspects of the purchase or sale orally – the proverbial handshake agreement – when it comes time to get everything on paper to seal the deal, buyer and seller could well be at loggerheads over what they thought they agreed to.
Also, if a post-sale issue arrives that is not covered by an agreement in writing, both parties will find it impossible to enforce whatever it is they “agreed upon'' in court. Courts can only enforce what is on a legal document.
Work with an Experienced Real Estate Attorney
Many buyers and sellers figure they can get the attorneys involved once they’ve agreed upon the details – price, closing date, and so on – but that is not always the best option. Even in preliminary negotiations, a casual or misguided remark by either buyer or seller can sink the deal. It’s better to have the attorneys involved from the very beginning and let them handle or advise on the negotiations.
Without a doubt, you need to rely on attorneys for the Letter of Intent and the Purchase and Sale Agreement. These documents are far too important to just “fill in the blanks” on preprinted forms. An attorney will make sure that all angles are covered and you — whether buyer or seller — are being fully protected against errors, misunderstandings, and even outright misrepresentation.