Adaptive Reuse Of Underutilized Real Estate

Cool Projects – A Love Affair Revisited

We are entering a new frontier for adaptive re-use. The worldwide COVID-19 pandemic has left the urban commercial landscape in tatters. Shuttered vacant commercial space is commonplace throughout cities and towns. Doors and windows are boarded-up in shopping districts and entertainment districts that were thriving as recently as February 2020. Some have become barely recognizable.

Looking to the Future

What is to become of this vast inventory of vacant retail space, shuttered restaurants, empty hotels and office buildings, abandoned shopping malls, cavernous and empty theaters, stranded travel destinations, and more? Who will have the vision and courage to adapt and redevelop these properties into newly viable economic jewels? And when?

Make no mistake; it will happen. And it’s likely to happen much more quickly than you think.

While many are just beginning to peak their cautious heads out from under their COVID blankets, value-add developers are assembling to scoop-up valuable assets to be reimagined and repositioned for economic glory. If you believe the residential real estate market is hot, hold onto your collective hats. There are enormous profits to be made in commercial real estate and new business. These COVID-depressed sectors have struggled during the COVID shutdown, but unless the government blows it with short-sighted regulation and foolish tax policy, substantial economic revitalization is about to commence. Jobs, business opportunities, community-desired services and amenities, and great economic rewards are on the horizon. The ingenuity and creativity of value-add developers and the entrepreneurs they enable, coupled with vast amounts of available capital, are about to be unleashed in a torrent.

Pent-up demand is a powerful force. We are about to witness the creative power of visionary value-add developers as they reimagine and reinvent vacant and underutilized commercial space and turn it into some remarkably Cool Projects. I can’t wait!

COOL PROJECTS – Real Estate Projects I Love to Work On.

I love cool real estate projects. Cool projects are why I became a lawyer. Cool projects are why I come to the office each day. Cool real estate projects are why I did not become an astrophysicist (well, one reason – although, that might have been cool too). Cool projects are the reason I live, smile, dance, breath, scour the earth for new deals, jump for joy.

And by “cool”, I don’t mean in a thermal sense – but rather in a “this project is so cool” sense. I am referring to real estate projects that are awesome. Real estate projects that are fun. Real estate projects that make you say “Wow – what a cool project!”

Cool projects don’t need to be costly projects in major urban centers – although those can be cool too. I’m talking about projects that are creative. Projects that require vision and imagination. Projects that take something mundane and turn it into something special.

Some people think I only like huge projects. To be honest, I do like huge projects, but largely because the huge projects I have worked on also happened to be cool projects.

Redevelopment of the commercial portions of Marina City in downtown Chicago was a cool project. Ground-up development of Sears Centre Arena in Hoffman Estates, Illinois was a cool project. Work on various mixed-use projects around the Midwest and upstate New York have been cool projects. But so has been the much smaller development of an 8,000 square foot microbrewery in the historic Motor Row District of Chicago using TIF financing; development of countless restaurant and entertainment venues throughout the Midwest; conversion of a multi-story industrial building into a high-tech office center; conversion of an outdated office building into a stylish, luxury hotel; adaptive reuse of outdated retail strip centers, bank buildings, city and suburban office buildings, bowling alleys, warehouses, industrial buildings, gas stations, and various small to medium sized special purpose buildings into modern, fully functional jewels – reinvented to provide much needed retail and service amenities for local neighborhoods and communities. It is not the size of the project that makes it cool – or the cost – it is the concept, imagination and creative challenge involved that makes the difference. At least for me.

Cool Projects Test

Here’s a test [call it the “Cool Projects Test”, if you will]:

Which of the following projects is more likely to end up on Kymn Harp’s list of cool projects?

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If experience teaches us anything, it teaches that the COVID-19 pandemic will end.  Things we enjoyed before, will be enjoyed again. People still want to shop, travel, dine-out, go to theater, attend live concerts and sporting events, marvel at fireworks displays, celebrate family gatherings, and do all the things that enrich our lives.  Demand did not simply evaporate; it remains strong. Pressure is building. Pent-up demand is rising. It is waiting to be unleashed. Are you ready?

Pundits speak of a “new normal” – but what does that even mean?

Not long ago, during the Great Recession, we heard talk of a new normal as well. How long did it take for that new normal to become a faded memory once the economy rebounded and began to expand? (Not long.)

Clearly, this pandemic has been devastating, with tragic loss of life, severe illness, and widespread economic devastation. New words and phrases have entered our lexicon, like asymptomatic, social distancing, bending-the-curve, intubation, N95, no-mask/no entry, quarantine, self-isolation, COVID-Lease amendments, COVID-abatements, PPP loans, sneeze-barriers, and the like. Although we learned in pre-school to “wash our hands”, we’ve gained new appreciation for this simple task since March 2020.

Discussions now focus on a need to reconfigure health facilities, office space, restaurants, hotels, conference centers, congregate living facilities, schools, places of worship, public transportation, shopping centers, and more, to prevent the spread of infectious disease.  Some claim this pandemic will cause a seismic shift away from urban living and centralized business districts, in favor of far-flung regions linked together by Zoom or other remote video-conferencing technologies.

But will it?  

A growing number of medical experts believe that multiple effective vaccines and treatments will be available shortly, which could bring the COVID pandemic to an end by the third or fourth quarter of 2021. What then?

When COVID cases are no longer in the news, will we remain preoccupied with social distancing, isolation, remote offices, and remote meetings? Or will be get back to business as usual?  Will we stay hunkered down in our suburban home-offices while our competition is out actively meeting with prospects and clients, looking for development opportunities, and doing business in person?

Is the central business district dead? Is urban living to be no more? Will theaters, bars, and restaurants remain closed? Navy Pier? Magnificent Mile? The restaurant and shopping scene in Chicago’s West Loop, Fulton Market, Pilsen, Greektown, Streeterville, Chinatown, Little Italy, Bronzeville, River North, and neighborhoods and suburbs beyond?  Are they gone for good? 

How long will it take before the “new normal” gives way to the “old normal” – with restaurants and banquet halls reopening, people dining out, going to live concerts, returning to the office, taking vacations, meeting in-person with customers, clients and friends, going to sporting events and live theater or the movies, spending money on leisure activities, buying urban condos, staying at downtown hotels, and doing all the things they recently enjoyed? 

What are the implications for adaptive reuse of commercial space left vacant by this pandemic, and for commercial real estate investment and development, and for business in general? What will be in demand this next summer and fall? 

What will be the turning point? Many of my clients are already looking past the pandemic to the next wave of opportunity. Are you?  

How are you positioning yourself for the opportunities that are coming? Is your professional team still intact? Did they retire? Move away? Go out of business?

What opportunity awaits?

            Are you ready for what comes next? Should we talk?

Thanks for listening,

Kymn

Lawyers are like most other business professionals. We want your business and we want your referrals – we just don’t always know the best way to ask for either.

Take me for example. I’ve been handling commercial real estate transactions and business deals for nearly 40 years. I’ve loved (almost) every day of it, and I look forward to many more (knock on wood). My clients appreciate my insights and value the guidance I provide. Other attorneys respect what I do, and brokers and CPAs like working with me because I strive for practical solutions to efficiently and effectively get the job done. I pay close attention to learn my clients’ business objectives, then work diligently and negotiate hard to get my clients what they expect – when they expect it. That’s what lawyers do. Or at least what all lawyers should do. For any client hiring a lawyer, what else is there?  Achieving client objectives and getting the deal closed on time is why lawyers exist. Deals fail, for sure, but we can never be the reason they fail. Deals that fail are a waste of everyone’s time and money. Getting the deal done, if it can be done, is our value proposition.

Deals are my lifeblood – my passion. They’re why I wake up every morning and get out of bed. I love this stuff. I can’t explain exactly why that is – it just is.  Why do musicians practice their instruments and play? Why do scratch golfers golf? Why do competitive skiers ski?  It’s our passion. We don’t know exactly why – it comes from within. And we always need more.

Commercial real estate deals always come first for me, but in every commercial real estate project is a business. They go hand in hand. My preference for a good real estate deal over a good business deal is a matter of only slight degree. There’s not really a number one and a number two. It’s more like #1 and #1A.

So what’s the problem?

The problem is, a lot of people don’t know I’m available to represent them. I write books and articles on commercial real estate. I give seminars on how to structure and close business and real estate transactions. I publish a commercial real estate and business blog.  People think I’m busy, or that I only handle huge deals. The truth is, I am busy – but never too busy to handle another deal, large or small. In the words of the late, great Lucille Ball: “If you want something done, ask a busy person to do it.” We all loved Lucy!

The most shocking question I get from prospective clients is: “Would you (I) be willing to handle my (their) next business or commercial real estate deal?”  Are they kidding? My answer is always an emphatic “yes”! It’s my passion. It’s my love.  It’s what I live for.

To be sure, I’m a business professional, and I charge for what I do, but if you have a commercial real estate deal or business deal, and need representation, I’m in. Never be shy about calling me. We’ll work out the economics. The range of deals I handle is extraordinarily diverse. For a taste, look at my blog Harp-OnThis.com, or check out my latest book, Illinois Commercial Real Estate on Amazon.com or in your local public library. I love this stuff. I need this stuff. Of course I want to represent you. When can we get started?

So back to my initial point:  I do want your business and your business referrals. Like many other business professionals, I just don’t know the best way to go about asking for it. What do you suggest?

 2016 Updat

Are you planning to purchase, finance, develop or redevelop any of the following types of commercial real estate in the USA?

• Shopping Center
• Office building
• Large Multifamily/Apartments/Condominium Project
• Sports and/or Entertainment Venue
• Mixed-Use Commercial-Residential-Office
• Parking Lot/Parking Garage
• Retail Store
• Lifestyle or Enclosed Mall
• Restaurant/Banquet Facility
• Intermodal logistics/distribution facility
• Medical Building
• Gas Station
• Manufacturing facility
• Pharmacy
• Special Use facility
• Air Rights parcel
• Subterranean parcel
• Infrastructure improvements
• Other commercial (non-single family, non-farm) property

A KEY element of successfully investing in commercial real estate is performing an adequate Due Diligence Investigation prior to becoming legally bound to acquire or finance the property.  Conducting a Due Diligence Investigation is important not just to enable you to walk away from the transaction, if necessary, but even more importantly to enable you to discover obstacles and opportunities presented by the property that can be addressed prior to closing, to enable the transaction to proceed in a manner most beneficial to your overall objective. An adequate Due Diligence Investigation will assure awareness of all material facts relevant to the intended use or disposition of the property after closing. This is a critical point. The ultimate objective is not just to get to Closing – but rather to confirm that the property can be used or developed as intended after Closing.

The following checklists – while not all-inclusive – will help you conduct a focused and meaningful Due Diligence Investigation.

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Illinois LLCs – The Asset Protection Advantage

A Technical Analysis

Among sophisticated investors and other high-asset/high-net worth individuals and businesses, the topic of “asset protection” is bound to arise. As many became painfully aware during the recent Great Recession, bad things can happen to good people. In my article Asset Protection – Lessons Learned, I discussed how properly structuring one’s holdings could have prevented, or at least mitigated, much of the financial devastation and anguish experienced by business owners, investors, real estate developers, doctors and others caught off-guard by the drastic economic collapse of 2007-2010.

Often, there is confusion about what the term asset protection really means. Some imagine a shadowy network of off-shore trusts and secret bank accounts in foreign lands set up by unscrupulous characters to cheat innocent creditors. This is simply not true. In this article I will not debate the claimed pros and cons of secret bank accounts and so-called off-shore asset protection trusts. I will say, however, that under most circumstances, they don’t work for U.S. citizens residing in the U.S.A.

Legitimate asset protection is nothing more or less than properly ordering one’s business and financial affairs in a way that does not unnecessarily expose all assets to claims of creditors.

The right of persons and businesses to limit their liability and exposure of their assets to claims of creditors is the well settled in the U.S.A. The United States of America, and each individual state, has a plethora of laws authorizing and recognizing the legitimacy of corporations and other limited liability entities as a means by which an investor can segregate assets and limit exposure to liability.

No person has a legal or moral obligation to structure his or her affairs in a way that makes it easy for a creditor of one business or professional enterprise to attach assets of the investor not committed to that enterprise. This protection may be impinged if the person or business engages in conduct tantamount to fraud, but actions explicitly authorized by applicable statute can hardly be characterized as being fraudulent. Fraud is an intentional tort requiring, among other elements, intentional breach of a duty owed to the person claimed to be harmed. If a statute expressly authorizes conduct, it implicitly, if not explicitly, negates any duty to act in a manner contrary to that authorized by the statute.

This article presents a technical analysis of certain asset protection attributes of an Illinois limited liability company expressly authorized by the Illinois Limited Liability Company Act, 805 ILCS 180/1-1 et seq (the “Illinois LLC Act”). The remarkably robust asset protection value of an Illinois limited liability company is measured by two key attributes:

1. The ability, expressly authorized by the Illinois LLC Act, to include in an LLC operating agreement provisions that protect the limited liability company and its business and assets from claims owed to others by members of the LLC – an attribute that creates a huge advantage vs. a corporation, as discussed in Part I, below; and

2. Enhanced protection of Members and Managers from liability for debts, contracts and torts incurred by the LLC, or resulting from acts or omissions of a Member or Manager while acting on behalf of the LLC, to an extent measurably greater than the protection afforded officers, directors and shareholders of a corporation.

Although one might reasonably expect that the order in which these key attributes are discussed would be reversed, the Part I discussion precedes the Part II discussion because the matters to be discussed in Part I are best considered at the outset, when the operating agreement is being drafted; while the matters discussed in Part II will most directly apply later, once a judgment creditor is seeking to enforce its judgment.

PART I: Key Statutory Provisions to Consider When Drafting the Operating Agreement

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“The best time to plant a tree was twenty years ago.

        The second best time is today.”

Chinese proverb

For over 35 years, I have represented commercial real estate investors, developers and business owners. Most of that time has been spent helping them acquire, finance, expand, develop, manage and grow their assets and businesses. For the past 5 to 6 years, as we have struggled through the Great Recession, a huge amount of my time has been spent helping clients keep their assets.

Growing up, I was steeped in the practical view that it is not so much what you acquire that counts, but, rather, what you keep. My parents and grandparents were not in the real estate business to make others wealthy. They were playing real life Monopoly®. They played to win. It was less about money for money’s sake than it was

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Of Course We Can Sue Them . . . But Can We Hold Them Liable?

No one knows everything. It’s a simple fact of life. Often, businesses turn to other businesses and professionals to obtain needed information. The range of commercial information providers assisting business owners and real estate investors, developers and lenders gather and analyse information is vast.

The question is: Do we have a legal right to rely on the information they provide? What if the information is wrong? What if we rely on that incorrect information and suffer a loss? Is the information provider liable?

It could be anything from hiring an appraiser to appraise a property to support a commercial loan; hiring a lab to analyze nutrition and caloric content of food products; or engaging a financial consultant to evaluate a company’s assets and liabilities as part of a business acquisition or merger; or seeking out a lending institution to provide information regarding the creditworthiness of a potential borrower. We might hire a structural engineer to evaluate the structural integrity of a building or bridge or other structure; or engage a surveyor to determine the scope and size of a parcel of land, or the location of easements and improvements located on the property, or the existence of rights of way to access the property; or we might retain a person or business holding itself out as a “due diligence” expert to investigate the essential facts necessary to enable us to determine whether to proceed with a particular transaction or project. The list of commercial information providers we rely upon to conduct our affairs is nearly endless.

Another simple fact of life is that people can and do make mistakes. They misinterpret information. Misstate the facts. Fail to discover and disclose all material information necessary to make information they have provided sufficient to enable informed action and decision-making.

What happens when your information provider gives you bad information and you suffer a loss as a result? Do you have any recourse? What if

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NOTICE TO MUNICIPALITIES:  If you want economic development, ACT LIKE IT!

Sometimes, municipalities can be their own worst enemies when it comes to economic development. At best, things they sometimes do, or don’t do, evidence disinterest, if not incompetence. Alternatively, it may evidence a breach of trust to the community and local taxpayers.

Here’s the situation:

Recently, in representing developers before a variety of municipal governments, I have been struck by the Jekyll and Hyde  approach many have when in comes to economic development. Often, the city, town or village will have a fully staffed economic development department. It may pay hundreds of thousands of dollars per year, if not millions of dollars per year, to pay economic development staff salaries and to cover associated overhead. It will allocate or approve millions of dollars per year in economic development grants, tax incentives, tax increment financing, real estate tax abatements, sales tax revenue sharing, and other economic incentives to encourage investors and developers to bring private development to the city to create jobs, remove blight, increase land values and otherwise improve the quality of life of the community.  These are all proper uses of public economic development funds.

Then what?

As is necessary, the developer has its architect submit plans to the municipal building department for review and approval to obtain a building permit. There is nothing controversial about that, right? But then, in a remarkably high number of circumstances, the permitting process proceeds at only glacial speed.

How long should it take to review plans and specifications for a modest sized project that will bring jobs and economic opportunity to the city? The city has already confirmed that it wants the project by granting development incentives to the developer for the project. When the developer’s architect is moving forward as quickly as practical to obtain the building permit, should it take the municipal building department 9 to 10 months to issue a building permit on a modest sized structure? I’m not talking about a building the size of Trump Tower – I’m referring to buildings of less than 30,000 square feet. How long is reasonable?  Is a building permit review process that takes 9 to 10 months necessary or reasonable? How is that promoting economic development?

And once the building permit is issued, and work begins – how often should work have to stop because city building inspectors fail to show up for scheduled inspections?

Private investors and developers cannot afford – literally – to sit around and wait extended periods of time to move a project to completion. Market conditions change. The cost and availability of money changes. Commercial tenants choose other options.

The Point?

The point here is that municipalities need to get their act together if they want to promote economic development in their communities. Not all cities, towns and villages are guilty of dragging their feet or sending mixed messages, but there are many more than you may think. For developers, time really is money.

It is counterproductive – and more than a bit silly – for local governments to “give away” economic incentives to promote economic development, and then have their building departments drag their municipal feet in facilitating completion of the project. Economic development staff and their building department siblings need to get on the same page and follow the same agenda if a municipality truly wants to promote economic development.

Promoting Economic Development

Promoting economic development is not merely a matter of handing out economic incentives. That can be useful – and sometimes necessary – to promote economic development in your community, but it is not the whole story. To get the economic development engine running, local governments need to take a holistic approach that fully embraces and encourages desired economic development. It needs to walk the walk.  It needs to expedite services to facilitate development. It needs to get its collective act together – in all municipal departments – to genuinely do what is in the best economic interests of the community.

Commercial developers and their prospective commercial tenants and users have choices as to where to invest their money to build new projects that promote economic growth. Most development opportunities are regional, if not national or global. If your town will not do all it can reasonably do to truly promote economic development in a meaningful way, some other town likely will.

This is not a threat – it is a practical reality. If you are in local government and genuinely want economic development, I suggest, with all due respect, that you act like it.

Thanks for listening.

Kymn

ICSC RECon 2014 is in full swing as the largest retail real estate convention in the world. Every year, retail owners, investors, developers, lenders and other commercial real estate professionals converge on Las Vegas, NV to network, discover, promote their projects, look for development opportunities and make new deals. This year is no exception. There are an estimated 33,000 real estate professionals in attendance for this action-packed three day convention at the Las Vegas Convention Center.

Once again this year, members of the International Council of Shopping Centers are recognizing and acknowledging the need for public-private partnerships with local communities to promote economic development. The extremely difficult economic conditions over the past several years have taken a toll on communities and developers alike. Now, more than ever, they need each other to facilitate mutually beneficial development.

To help local governments establish and promote much needed permanent, beneficial economic changes for their communities, ICSC in cooperation with other development groups and agencies continues to

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Are you planning to purchase, finance or develop any of the following types of Commercial or Industrial Real Estate?

• • Shopping Center?
• • Office Building?
• • Large Multifamily residential?
• • Parking Lot/Parking garage?
• • Retail Store?
• • Mixed-Use?
• • Restaurant/Banquet property?
• • Sports and Entertainment Venue?
• • Intermodal Logistics Terminal?
• • Medical Building?
• • Gas Station?
• • Distribution Center?
• • Manufacturing facility?
• • Pharmacy?
• • Special Use facility ?
• • Other?

A KEY element to successfully investing in commercial or industrial real estate is performing an adequate Due Diligence Investigation prior to becoming legally bound to acquire the property. An adequate Due Diligence Investigation will assure awareness of all material facts relevant to the intended use or disposition of the property after closing.

 The following checklists will help you conduct a focused and meaningful Due Diligence Investigation.

 BASIC DUE DILIGENCE CONCEPTS

 Caveat Emptor: Let the Buyer beware.

Consumer protection laws applicable to home purchases seldom apply to commercial real estate transactions. The rule that a Buyer must examine, judge, and test for himself, applies to the purchase of commercial real estate.

Due Diligence:

“Such a measure of prudence, activity, or assiduity, as is proper to be expected from, and ordinarily exercised by, a reasonable and prudent (person) under the particular circumstances; not measured by any absolute standard, but depending upon the relative facts of the special case.” Black’s Law Dictionary; West Publishing Company.

Contractual representations and warranties are NOT a substitute for Due Diligence. Breach of representations and warranties = Litigation, time and $$$$$.

The point of commercial real estate due diligence is to avoid transaction surprises and confirm the Property can be used as intended.

 WHAT DILIGENCE IS DUE?

The scope, intensity and focus of any Due Diligence Investigation of commercial or industrial real estate depends upon the objectives of the party for whom the investigation is conducted. These objectives may vary depending upon whether the investigation is conducted for the benefit of: (i) a Strategic Buyer (or long-term lessee); (ii) a Financial Buyer; (iii) a Developer; or (iv) a Lender.

If you are a Seller, understand that to close the transaction your Buyer and its Lender must address all issues material to their respective objectives – some of which require information only you, as Owner, can adequately provide.

GENERAL OBJECTIVES:

 (i) A “Strategic Buyer” (or long-term lessee) is acquiring the property for its own use and must verify that the property is suitable for that intended use.

 (ii) A “Financial Buyer” is acquiring the property for the expected return on investment generated by the property’s anticipated revenue stream, and must determine the amount, velocity and durability of the revenue stream. A sophisticated Financial Buyer will likely calculate its yield based upon discounted cash-flows rather than the much less precise capitalization rate (“Cap. Rate”), and will need adequate financial information to do so.

 (iii) A “Developer” is seeking to add value by changing the character or use of the property – usually with a short-term to intermediate-term exit strategy to dispose of the property; although, a Developer might plan to hold the property long term as a Financial Buyer after development or redevelopment. The Developer must focus on whether the planned change in character or use can be accomplished in a cost-effective manner.

 (iv) A “Lender” is seeking to establish two basic lending criteria:

 (1) “Ability to Repay” – The ability of the property to generate sufficient revenue to repay the loan on a timely basis; and

 (2) “Sufficiency of Collateral” – The objective disposal value of the collateral in the event of a loan default, to assure adequate funds to repay the loan, carrying costs and costs of collection in the event forced collection becomes necessary.

The amount of diligent inquiry due to be expended (i.e. “Due Diligence”) to investigate any particular commercial or industrial real estate project is the amount of inquiry required to answer each of the following questions to the extent relevant to the objectives of the party conducting the investigation:

I. THE PROPERTY:

 1. Exactly what PROPERTY does Purchaser believe it is acquiring?

• Land?

• Building?

• Fixtures?

• Other Improvements?

• Other Rights?

• The entire fee title interest including all air rights and subterranean rights?

• All development rights?

 2. What is Purchaser’s planned use of the Property?

 3. Does the physical condition of the Property permit use as planned?

• Commercially adequate access to public streets and ways?

• Sufficient parking?

• Structural condition of improvements?

• Environmental contamination?

• Innocent Purchaser defense vs. exemption from liability

• All Appropriate Inquiry

 4. Is there any legal restriction to Purchaser’s use of the Property as planned?

• Zoning?

• Private land use controls?

• Americans with Disabilities Act?

• Availability of licenses?

• Liquor license?

• Entertainment license?

• Outdoor dining license?

• Drive through windows permitted?

• Other impediments?

 5. How much does Purchaser expect to pay for the property?

 6. Is there any condition on or within the Property that is likely to increase Purchaser’s effective cost to acquire or use the Property?

• Property owner’s assessments?

• Real estate tax in line with value?

• Special Assessment?

• Required user fees for necessary amenities?

• Drainage?

• Access?

• Parking?

• Other?

 7. Any encroachments onto the Property, or from the Property onto other lands?

 8. Are there any encumbrances on the Property that will not be cleared at Closing?

• Easements?

• Covenants Running with the Land?

• Liens or other financial servitudes?

• Leases?

9. If the Property is subject to any Leases, are there any:

• Security Deposits?

• Options to Extend Term?

• Options to Purchase?

• Rights of First Refusal?

• Rights of First Offer?

• Maintenance Obligations?

• Duty of Landlord to provide utilities?

• Real estate tax or CAM escrows?

• Delinquent rent?

• Pre-Paid rent?

• Tenant mix/use controls?

• Tenant exclusives?

• Tenant parking requirements?

• Automatic subordination of Lease to future mortgages?

• Other material Lease terms?

10. New Construction?

• Availability of construction permits?

• Soil conditions?

• Utilities?

• NPDES (National Pollutant Discharge Elimination System) Permit?

• Permit required if earth is disturbed on one acre or more of land.

• If applicable, Storm Water Pollution Prevention Plan (SWPPP) is required.

II. THE SELLER:

1. Who is the Seller?

• Individual?

• Trust?

• Partnership?

• Corporation?

• Limited Liability Company?

• Other legally existing entity?

2. If other than natural person, does Seller validly exist and is Seller in good standing?

3. Does the Seller own the Property?

4. Does Seller have authority to convey the Property?

• Board of Director Approvals?

• Shareholder or Member approval?

• Other consents?

• If foreign individual or entity, are any special requirements applicable?

• Qualification to do business in jurisdiction of Property?

• Federal Tax Withholding?

• US Patriot Act compliance?

5. Who has authority to bind Seller?

6. Are sale proceeds sufficient to pay off all liens?

III. THE PURCHASER:

1. Who is the Purchaser?

2. What is the Purchaser/Grantee’s exact legal name?

3. If Purchaser/Grantee is an entity, has it been validly created and is it in good standing?

• Articles or Incorporation – Articles of Organization

• Certificate of Good Standing

4. Is Purchaser/Grantee authorized to own and operate the Property and, if applicable, finance acquisition of the Property?

• Board of Director Approvals?

• Shareholder or Member approval?

• If foreign individual or entity, are any special requirements applicable?

• Qualification to do business in jurisdiction of the Property?

• US Patriot Act compliance?

• Bank Secrecy Act/Anti-Money Laundering compliance?

5. Who is authorized to bind the Purchaser/Grantee?

IV. PURCHASER FINANCING:

A. BUSINESS TERMS OF THE LOAN:

1. What loan terms have the Borrower and its Lender agreed to?

• What is the amount of the loan?

• What is the interest rate?

• What are the repayment terms?

• What is the collateral?

• Commercial real estate only?

• Real estate and personal property together?

• First lien?

• A junior lien?

• Is it a single advance loan?

• A multiple advance loan?

• A construction loan?

• If it is a multiple advance loan, can the principal be re-borrowed once repaid prior to maturity of the loan; making it, in effect, a revolving line of credit?

• Are there reserve requirements?

• Interest reserves?

• Repair reserves?

• Real estate tax reserves?

• Insurance reserves?

• Environmental remediation reserves?

• Other reserves?

2. Are there requirements for Borrower to open business operating accounts with the Lender? If so, is the Borrower obligated to maintain minimum compensating balances?

3. Is the Borrower required to pledge business accounts as additional collateral?

4. Are there early repayment fees or yield maintenance requirements (each sometimes referred to as “pre-payment penalties”)?

5. Are there repayment blackout periods during which Borrower is not permitted to repay the loan?

6. Is a profit participation payment to Lender required upon disposition?

7. Is there a Loan Commitment fee or “good faith deposit” due upon Borrower’s acceptance of the Loan Commitment?

8. Is there a loan funding fee or loan brokerage fee or other loan fee due Lender or a loan broker at closing?

9. What are the Borrower’s expense reimbursement obligations to Lender? When are they due? What is the Borrower’s obligation to pay Lender’s expenses if the loan does not close?

B. DOCUMENTING THE COMMERCIAL REAL ESTATE LOAN

Does Purchaser have all information necessary to comply with the Lender’s loan closing requirements?

Not all loan documentation requirements may be known at the outset of a transaction, although most commercial real estate loan documentation requirements are fairly typical. Some required information can be obtained only from the Seller. Production of that information to Purchaser for delivery to its lender must be required in the purchase contract.

As guidance to what a commercial real estate lender may require, the following sets forth a typical Closing Checklist for a loan secured by commercial real estate.

Commercial Real Estate Loan Closing Checklist

1. Promissory Note

2. Personal Guaranties (which may be full, partial, secured, unsecured, payment guaranties, collection guaranties or a variety of other types of guarantees as may be required by Lender)

3. Loan Agreement (often incorporated into the Promissory Note and/or Mortgage in lieu of being a separate document)

4. Mortgage (sometimes expanded to be a Mortgage, Security Agreement and Fixture Filing)

5. Assignment of Rents and Leases.

6. Security Agreement

7. Financing Statement (sometimes referred to as a “UCC-1”, or “Initial Filing”).

8. Evidence of Borrower’s Existence In Good Standing; including :

(a) Certified copy of organizational documents of borrowing entity (including Articles of Incorporation, if Borrower is a corporation; Articles of Organization and written Operating Agreement, if Borrower is a limited liability company; certified copy of trust agreement with all amendments, if Borrower is a land trust or other trust; etc.)

(b) Certificate of Good Standing (if a corporation or LLC) or Certificate of Existence (if a limited partnership) or Certificate of Qualification to Transact Business (if Borrower is an entity doing business in a State other than its State of formation)

9. Evidence of Borrower’s Authority to Borrow; including:

(a) Borrower’s Certificate

(b) Certified Resolutions

(c) Incumbency Certificate

10. Satisfactory Commitment for Title Insurance (which will typically require, for analysis by the Lender, copies of all documents of record appearing on Schedule B of the title commitment which are to remain after closing), with required commercial title insurance endorsements, often including:

(a) ALTA 3.1 Zoning Endorsement modified to include parking [although if the property is a multi-user property, such as a retail shopping center, an ALTA 3.0 Zoning Endorsement may be appropriate]

(b) ALTA Comprehensive Endorsement 1

(c) Location Endorsement (street address)

(d) Access Endorsement (vehicular access to public streets and ways)

(e) Contiguity Endorsement (the insured land comprises a single parcel with no gaps or gores)

(f) PIN Endorsement (insuring that the identified real estate tax permanent index numbers are the only applicable PIN numbers affecting the collateral and that they relate solely to the real property comprising the collateral)

(g) Usury Endorsement (insuring that the loan does not violate any prohibitions against excessive interest charges)

(h) other title insurance endorsements applicable to protect the intended use and value of the col- lateral, as may be determined upon review of the Commitment for Title Insurance and Survey or arising from the existence of special issues pertaining to the transaction or the Borrower.

11. Current ALTA/ACSM Land Title Survey (3 sets), prepared in accordance with the 2011 (or current) Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys

12. Current Rent Roll

13. Certified copy of all Leases (4 sets – 1 each for Buyer, Buyer’s attorney, Title Company and Lender)

14. Lessee Estoppel Certificates

15. Lessee Subordination, Non-Disturbance and Attornment Agreements [sometimes referred to simply as “SNDAs”]

16. UCC, Judgment, Pending Litigation, Bankruptcy and Tax Lien Search Report

17. Appraisal -complying with Title XI of FIRREA (Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended)

18. Environmental Site Assessment Report (sometimes referred to as Environmental Phase I and/or Phase 2 Audit Reports)

19. Environmental Indemnity Agreement (signed by Borrower and guarantors)

20. Site Improvements Inspection Report

21. Evidence of Hazard Insurance naming Lender as the Mortgagee/Lender Loss Payee; and Liability Insurance naming Lender as an “additional insured” (sometimes listed as simply “Acord 27 and Acord 25, respectively)

22. Legal Opinion of Borrower’s Attorney

23. Credit Underwriting documents, such as signed tax returns, property operating statements, etc. as may be specified by Lender

24. Compliance Agreement (sometimes also called an Errors and Omissions Agreement), whereby the Borrower agrees to correct, after closing, errors or omissions in loan documentation.

* * * * *

It is useful to become familiar with the Lender’s loan documentation requirements as early in the transaction as practical. The requirements will likely be set forth with some detail in the lender’s Loan Commitment – which is typically much more detailed than most loan commitments issued in residential transactions.

Conducting the Due Diligence Investigation in a commercial real estate transaction can be time consuming and expensive in all events.

If the loan requirements cannot be satisfied, it is better to make that determination during the contractual “due diligence period” – which typically provides for a so-called “free out” – rather than at a later date when the earnest money may be at risk of forfeiture or when other liability for failure to close may attach.

CONCLUSION

Conducting an effective Due Diligence Investigation in a commercial or industrial real estate transaction to discover all material facts and conditions affecting the Property and the transaction is of critical importance.

Unlike owner occupied residential real estate, when a house can nearly always be occupied as the purchaser’s home, commercial and industrial real estate acquired for business use or for investment is impacted by numerous factors that may limit its use and value.

The existence of these factors and their impact on a Purchaser’s ability to use the Property as intended can only be discovered through diligent and focused investigation and attention to detail.

Exercise Due Diligence.

If you need assistance, please ask for help.