Buying a commercial building for your business is a big step, with many aspects to the process.
PART ONE explained the criteria you need to set before you begin looking to buy a commercial building for your business. PART TWO covered locating properties, what you need to know before making an offer, and determining the sales price.
Today’s post focuses on the Non-Binding Letter of Intent, the Due Diligence Phase, and the Closing
A Non-Binding Letter of Intent
A letter of intent is a document in which the terms on which you would agree to buy a building are spelled out. I advise that you hire an attorney to help create this document as this will be a binding agreement. Most sellers won’t tolerate you forgetting something crucial then asking for an additional clause once everyone is in agreement.
Consider these Items:
- Identify the seller and their formal address for written notice
- Identify yourself and the address the seller can use to notify you
- Sales Price
- Deposit amount, when it is due and to whom it is paid (preferable to a title company)
- How many days you have to apply for a loan with the bank
- The ability to get your deposit back if any of the inspection items fail prior to the agreed upon expiration date
- An agreed-upon extension to complete items beyond the buyers control
- Structural inspection which will be completed by a particular date
- Mold Inspection, and the date it will be completed
- City Inspection, and date completed if required
- Title Work that is free and clear or can be cleared within a specific time
- Seller to provide all surveys in existence and date by which it is to be completed
- Zoning, and time to get zoning changes approved with the city
- Verify parcel ID number
- Environmental Testing completed by a specific date for a phase one
- If the phase one isn’t acceptable, then make sure there is time to complete a phase two
- An extension to the time table if a phase two is required due to possible contamination
- Copies of operating expenses for the last three years, due on a specific date
- Copies of all leases due on a specific date
- Estoppels sent to all tenants and due on a specific date
- For Condos, any rules or bylaws along with a due date
- Seller to notify buyer of any right-of-way on the property other than from utilities
- Review of right-of-ways to make sure you can build on the property if it doesn’t have existing buildings
- Determination of who is responsible for preparing the purchase agreement and how may days the lawyers have to get this done
- Identify how notices are to be made: via us mail, overnight, or other means
That is a long list, and you may need to address even more items that are important to your transaction.
Once the terms of the letter of intent are agreed upon and signed off by both parties, you will have determined how many days to give the attorneys to prepare an acceptable purchase agreement. I usually ask my clients to have their attorneys prepare the purchase agreement, so it is written to protect your needs.
Putting together a paper calendar to look at all the critical times is helpful.
You might notice one item had to be completed before another and thus there wasn’t enough time to complete the due diligence. If your due diligence date falls around any holiday, you will need to extend the dates. For instance, if the buyer has five days from December 23 to complete a physical inspection, you’ll most likely be out of luck in getting it done in the days surrounding the Christmas Holiday. Extend this to seven or ten business days. I usually add all of these due dates to my calendar so I don’t miss anything.
Mortgage approval, zoning approval, and environmental reports often take longer than expected. I always request the ability to send a notice to extend these timelines. If you don’t do this, you will be writing up an addendum to your contract over and over. Your attorney will happily do this for you but it will cost more money than necessary.
When buying real estate, you have to make a deposit. I suggest having the deposit due five days after the purchase agreement is fully executed.
Don’t give a check to the seller.
Find a title company that can be used to run the title and help you and the seller clear the title if necessary. They will also hold the deposit until the closing date. The title company will write up an agreement about how the buyer can get their money if something goes wrong.
Due Diligence Phase
Once the purchase agreement is finished you still have a lot of work ahead of you! If you put together the calendar as suggested, make sure all the dates are entered and met. If an item can’t be completed within the agreed upon time frame send the notice to the seller and extend the agreement.
If anything gets off kilter as you go through the process, turn to your attorney for advice.
It is not unusual for a building to fail the physical inspection. If you find the building needs an expensive repair, notify the seller in writing and ask for a deduction in the purchase price. Depending on the seller and any number of unknown reasons, the seller will decide whether or not to make a reduction in the price. If the seller won’t provide a credit you have to decide if you want to pay for this repair yourself and whether or not to cancel the agreement.
If everything is worked out the next step is the closing!
The title company will provide, in advance, a stack of documents for the closing. Have your attorney look over everything to make sure everything is in order before the closing. I always look at the taxes to make sure they have been calculated correctly. Mistakes are easily make so a quick check is good for everyone concerned.
Try not to set your closing on the last day of due diligence, especially if it is a holiday. I participated in a closing in which the money had been approved, but wouldn’t be available until the next day. We went ahead and closed, but no money changed hands for 24 hours. If we were at the last day, the seller or the buyer could have canceled the deal.
The title company will give you a list of what to bring to the closing and how much money will be paid. Usually the title company requires a certified check or a wire transfer. You will also be required to bring proof of insurance. And by the way, you can choose to close in the same room as the seller, or to be in separate rooms.
Then after an hour of signing your name at least 50 times you are the proud owner of the building!
Purchasing takes less work then a lease. Having a commercial attorney help you with writing the agreements will save you a lot of heartache.