Although each of these topics can be expanded on extensively, this is a good overview of the steps you should consider as a buyer of commercial real property in California. Your broker should help you obtain needed items and a real estate attorney can review them to make sure you are protected from the many potential risks in any transaction.
1) Find a Real Estate Broker & Enter into a Brokerage Agreement
- Find a Real Estate Broker licensed in CA
- The Broker should be well-versed in the type of property and location the buyer intends to buy
- Confirm the Broker has a satisfactory history of real estate transactions
- Make sure the scope and representation of the Broker is clear in writing (CA. Civ. Code §§2079.13)
- Who pays the Broker (Seller/Buyer?).
- Determine the terms of the transaction
2) Due Diligence
Getting the deal started – either with or without a letter of intent:
- Arrange meetings with Seller to receive all documents and information about the property
- Buyer sends due diligence list to Seller
- Determine the scope of the due diligence including: length, budget, physical inspections testing
Establish funding/lending & Conduct Inspections
- Buyer does property inspections
- Check title search, and chain of title, including: current ALTA/NSPS Land Title Survey, vesting deed, reciprocal easement agreements, covenants, conditions, and restrictions, easements, and deed restrictions that affect the property’s development and redevelopment, use, operation, maintenance, and access. (Usually reviewed by real estate legal counsel)
- Check entitlements for real property including: variances, conditional use permits, costal development permits (if location is by coast), shoreline development or use permits issued by local agencies, compliance with CA environmental Quality Act (CEQA); check California Land Conversation Act of 1965; check any local unreinforced masonry (URM) ordinances
- Check zoning confirmation letter
Paperwork
- Get copies of agreements that are binding on the property; including: Joint venture agreements, organizational documents, consents, loan documents, guaranties, 3rd party property agreements, leases, occupancy agreements. licenses, and services contracts
- Check tenant Estoppel certificates, subordination, non-disturbance, and attornment agreements
Financial/Tax
- Get copies of financial records, including: rent rolls, appraisals; financial statements, budgets, tax bills, tax returns, and assessment notes
- Check tax impacts that will result from the acquisition of real property
Permits
- Permits including: certificates of occupancy, building permits, and liquor license
- 3rd party approvals or consents
3) Purchase and Sale Agreement
Confirm entity-Who is buying the property and how will they hold it? (Examples: LLC, LP, tenancy in common or corporation)
Review the purchase and sale agreement (Broker Form or Attorney Drafted)
- Sale price, financing, 3rd party approvals or consents, leases
- Pre-closing terms (conditions, covenants, due diligence, closing deliveries)
- Post-closing terms (escrow, holdbacks, adjustments)
Special Considerations for CA
- State statutory disclosures: natural hazards, electrical usage, hazardous substances
- “As-is” clause (Civil Code § 1542 release)
- Liquidated damages
- Warranties
- Broker’s fee clause
- Allocation of city and county transfer taxes
- Independent consideration clause
Contingencies
- Contingencies: subdivision of property, financing, entitlements, conditional use permits, 3rd party approvals or consents, any other items of concern.
Closing
- Scheduled date for closing, documents are exhibits
- Consider maturity date of any financing commitment, any 1031 exchange deadlines, buyer’s loan financing schedule
Restrictions
- Seller’s right to continue to manage and operate property before closing (new leases, property agreements, and service contracts)
- Local law
4) Pre-Closing
Between signature of the Purchase and Sale Agreement and before closing
Complying to agreement
- Liens
- Statues/regulations compliance
- 3rd party consents
- Contingencies, and objection letters
- Any internal entity matters are completed before closing
- Make sure the necessary consents, waivers, estoppels and other notices are complied with before closing. (tenants, or other property related agreements)
Finance – review and approve loan documents
- Escrow – CA uses escrow for closing
- Get all legal property documents in order
Buyer name (Who is signing?)
- If it is an entity buying the property – ensure entity is in conformity with CA and registered with Secretary of State and ask escrow agent if you need to obtain a good standing certificate.
- Deliver organization and authority documents to the title company and lender for approval before the closing
5) Closing
Organization
- Have a calendar of important dates or expirations of contingency periods
- Review documents: rent, utility charges, taxes, contracts, operating expenses, leasing brokerage commissions, tenant improvement allowances, deposits, attorney fees, insurance
- Prepare tenant notice letters
- Prepare CA form 593-C
- Track documents and deadlines, including: utility reading before cut-off time, inventories, cut-off times for sending money wires, receipt of property files and other related files, keys, passcodes, assumed service contracts, and receipt of any estoppel or SNDAs
Disbursements
- Title costs and escrow fees based on the final bill prepared by the title company and escrow holder, survey costs, real estate taxes and assessments, utility charges, attorney fees, insurance premiums, brokers fees, due diligence fees
- Include payoff amount of Seller’s existing debt, deposits on the closing statement, and amounts that Buyer’s lender will fund at closing
Title
- Check the deed
- Check the transfer tax declaration and PCOR
- Check with county recorder that closing documents are recorded
- Confirm the list of documents required by the title company, Seller, and lender
- Ensure the person buying (if an entity) is in good standing
- Check good standing certificate or a certificate of status, organizational documents
- If it is a foreign entity- confirm it is qualified to do business in California
- Have consents or resolutions authorizing the transactions
- Check title insurance endorsements
Get all required parties to sign
7) Post-closing
- Have a calendar to track dates; including: Receipt of final title insurance policy, final survey, recorded documents, expiration of any post-closing indemnity periods, and release of any escrow funds
- Ensure all payments are made, with a receipt marked ‘paid’
- Ensure notice to tenants and service contract providers are delivered promptly after closing
This blog is written as of June 15, 2020. Recommendations and legal requirements are changing rapidly, so please continue to review our legal updates or review postings on relevant government websites.
All blogs on this site are for educational purposes only, do not constitute legal advice or opinion, and should not be applied to your situation, or any specific situation, without consultation with counsel. Strategy Law, LLP does not provide any legal advice concerning any matter discussed in a blog except upon formal engagement including, without limitation, execution of Strategy Law, LLP’s formal legal services agreement, and with respect to specific factual situations. No blog constitutes a guaranty, warranty, or prediction regarding the result of any legal matter discussed in the blog or any representation.
