The Commercial Transaction: Tips for the commercial newbie March 2007 Nash & Lodge PLLP By: Stephen J. Nash nash@nashandlodge.com   Two years ago you might have chosen to avoid becoming involved in a commercial real estate transaction, but in today's economy can you afford to say no?  You may even decide that it is a lucrative market  worth pursuing.  However, if you think that a commercial transaction is no different than a residential transaction you are in for a surprise.  If you treat it like a residential transaction you are likely to run into problems, and very well may fail to properly protect your client.  The following article will highlight some of the main differences between a residential and commercial transaction.  If you want to really understand a commercial real estate transaction, sign-up for our next seminar held in Andover on March 27th.   I.  What is Being Sold? Sounds like a simple question, but the answer is not always so clear.  The sale may involve only real estate, or it may involve real estate and a business.  If a business is included in the transaction, is the actual business being sold or just the assets of the business?  Even if the business is not being sold, is the financial condition of the business integral to the sale?  Are there tenants on the property?  Written leases?         II.  In Representing the Seller What Documents Do I Need to Gather? Depending on what is being sold, there are many documents that the buyer of the property is likely to require be produced.  To limit delays problems you should attempt to gather and organize these documents before you find a buyer. If the business is being sold you need to obtain all of the business creation documents and certificates from the state that prove the business is in good standing.  You will encounter a problem if you believe you are selling a corporation, but there are no corporate documents to verify this belief. If there are tenants on the property you will need to create a rent roll identifying each tenant, what they are renting, if they have a written lease, the terms of the lease, whether a security deposit is being held and if they are current on their obligations.  You need to obtain copies of all leases and addendums. You will need to obtain a copy of all contracts that affect the property, especially if they cannot be terminated as of the closing of any sale. In addition you may need the following: A.  Old Surveys, building plans, and title policies that relate to the property. B.  Copies of all licenses necessary to operate the business. C.  Financial statements, balance sheets and tax returns for the last three years (for sale of business or if financial condition of the business is integral to the sale. D.  Itemization of inventory together with values. E.  Itemization of personal property. III.  What Parties are Involved in the Commercial Transaction? Many of the parties involved in a residential transaction are also involved in a commercial transaction, but some have different roles or are slightly different than in a residential transaction. A.  Attorney Representing Seller/Buyer It is much more likely that attorneys will be involved in a commercial transaction than in a residential transaction.  These transactions can be extremely complicated with a number of legal issues that need be addressed.  You should work with the attorney representing your client.  Unlike a residential transaction you don't have to worry about having to tell you client that you cannot give them legal advice and you don't have to feel responsible for protecting them from legal problems because they are represented by an attorney. Talk to the attorney early in the process to see what documents need to be reviewed and how much time the attorney needs to review them.  Provide the attorney with all necessary documents in a timely manner.               B.  Commercial Lender A commercial lender is generally different than the residential lender.  Often the commercial lender is with a community or regional bank.  The loan terms are more negotiable, but the commercial lender will have more requirements for the borrower to meet.  Many of those requirements have to be addressed in the purchase agreement.  The borrower should know what will  be required before a purchase agreement is entered into so that he/she can require the seller to produce the required documents and potentially pay for any cost associated with the required documents (for example, if the lender requires an ALTA survey the purchase agreement must allow for this--who is going to pay for it?).  The loan terms should be reduced to writing into a loan commitment.                C.  Commercial Closer A commercial closing is much more complicated than a residential closing.  If the closer is not experienced in this area it can be frustrating.  It is much more likely in a commercial transaction that issues will arise.  An experienced closer can be invaluable in resolving these issues in a timely manner.  Without the necessary knowledge and experience you are likely to run into numerous delays.  IV.  The Purchase Agreement In a residential transaction the MAR purchase agreement and addendums are universally used and accepted.  In a commercial transaction there is no universally accepted purchase agreement.  It is difficult to use a generic form because each transaction is so unique.  A sale of a business is quite different than a sale of assets.  In the typical commercial transaction you may have to deal with real estate, business, employee/employer, tax, accounting, confidentiality, non-compete and many other issues.                 A.  Not Generic Since attorneys are often involved in the transaction, they typically draft the purchase agreement.  If no attorney is involved be extremely careful in drafting the purchase agreement or reviewing the purchase agreement.  If you don't know all of the issues that need to be addressed or if you don't know how to precisely draft the clauses that deal with the issues, think twice about drafting or reviewing the purchase agreement.  Advise your client that they need to hire an attorney to be properly protected.  If you undertake the drafting of the purchase agreement or review it, you have to realize the standard you will be held to is that of an attorney.                        B.  Special Clauses Most attorneys who do commercial work have various commercial purchase agreements and clauses pre-drafted to address the different types of sales and specific issues that may arise in a particular transaction. V.  Pre-Closing Review of Documents A commercial closing involves a great number of people and  documents, so issues commonly arise.  In order to have a smooth and successful closing the documents must be reviewed prior to closing so that issues can be spotted and dealt with prior to the closing.  If they are not reviewed and dealt with prior to the closing, the closing is going to take a long time to complete, to say nothing of other possible complications. The following are some documents that should be reviewed prior to the closing.  Some are documents that are produced by the seller and should be produced as early in the process as possible.  The closing documents will not be available early in the process, but plans should be made with the closer and the commercial lender to produce them prior to the closing for review.             A.  Tax Statements             B.  Financial Statements             C.  Leases             D.  Contracts             C.  Estoppel Agreements             D.  Loan Documents             E.  Title Commitment             F.  Closing Documents If personal property, inventory or accounts receivables are involved in the sale the buyer and seller should get together prior to the closing to go through each to determine what personal property is being transferred and in what condition, the amount and value of the inventory and the amount of accounts receivable. VI.  Closing       The closing generally involves more people than the typical residential closing.  It is not uncommon to have the loan officer, attorneys for the seller, buyer and bank, accountants, real estate agents and closers for the seller and buyer present at the closing. A.  Marked Commitment The buyer needs a marked commitment for an owner's title policy.  The marked commitment shows the status of the title that the buyer wants issued after the closing.    B.  Corporate Resolutions If either the buyer or seller is a corporate entity, they need the proper corporate resolutions authorizing the sale, purchase and/or the borrowing of the money necessary to purchase the property. C.  Assignments Contracts and/or leases that the buyer is assuming must be assigned to the buyer.  All original contracts and leases should be transferred to the buyer.  How are the security deposits being dealt with?  If approvals for the assignments were required they need to be presented. D.  Personal Property Commercial transactions quite often involve a substantial amount of personal property that needs to be identified so it can properly be transferred.  Any item that has a title certificate of some type must be identified and properly transferred at closing. E.  Inventory The inventory adjustment based on the purchase agreement and the inventory review must be appropriately dealt with on the closing statement. F.  Accounts Receivable Are they assumed by the buyer or retained by the seller?  Who is responsible for collecting the accounts receivable? G.  Employee Issues If the business is not being purchased, the buyer is generally going to require that the seller terminate all employees, even if the buyer plans on hiring some or all of them back. H.  Non-Compete In many cases, the buyer is going to require that the seller sign a non-competition agreement so that the buyer does not have to worry about having to compete with the seller.  III.  Summary A real estate agent performs an invaluable role in the commercial transaction provided they have the knowledge necessary to do the job.  If you are not experienced in this area you can learn how to do it. The first step is to recognize that it is not the same as a residential transaction.  The second step is to become familiar with commercial agents, closers, accountants, attorneys and bankers who can become great resources for you.  The third step is to learn how each can help your client and you in the commercial transaction (don't try to do everything yourself).  The fourth step is to get as much education you can relating to commercial transactions*. Commercial real estate transactions can be profitable and enjoyable endeavors, but only if you know what you are doing.  Commercial transactions are not the type of transactions that you can dabble in.     *Nash & Lodge, PLLP, is continually offering continuing education for real estate professionals and has a seminar on commercial transactions coming up on March 27th in Andover starting at 9:30 am.  If you are interested in taking this seminar, please contact Lisa Hansen at 763.862.6100 or at lisa.hansen@nashandlodge.com.  For future seminars please visit the Nash & Lodge website seminar webpage.          NOTICE: The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly applicable principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract is, or can be unique; the unique facts and specific language of the contract may require a different legal analysis and may result in a different outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney competent in the field of practice relevant to your situation.   Copyright 2008 Nash & Lodge, PLLP