Purchasing a commercial real estate property in Michigan is a multi-step process that can involve a whole host of documents and agreements.
Any party purchasing commercial real estate in Michigan should obtain the advice and counsel of an experienced real estate attorney as early in the transaction as possible. Working with an experienced real estate attorney will ensure that the agreements documenting the transaction are properly drafted and minimize the risk of legal issues arising at a later time.
In this guide, we'll walk you through each stage to help you understand what you'll encounter during your commercial property purchase in Michigan.
BACKGROUND AND GENERAL CONSIDERATIONS
1.) Letter of Intent
A letter of intent is usually the first transactional agreement entered into in connection with the purchase of a commercial real estate property.
A properly drafted letter of intent will indicate whether it is binding or non-binding, describe the basic terms of the proposed transaction and set the expectations of the parties prior to expending the time, cost and energy drafting and negotiating a purchase and sale agreement.
Although a letter of intent may be non-binding, certain provisions may be negotiated as binding between the parties, such as exclusivity and confidentiality.
2.) Purchase and Sale Agreement
A purchase and sale agreement is an agreement to convey real estate and establishes the terms and conditions for a real estate transaction.
The length and terms of the purchase and sale agreement will depend on the size, type, and nature of the commercial property being sold, as well as the relative bargaining power of the parties involved in the transaction. A properly drafted purchase and sale agreement will, among other things, include provisions on: (i) purchase price; (ii) earnest money deposit; (iii) due diligence and financing periods, if applicable; (iv) closing conditions; (v) representations and warranties of the parties; (vi) indemnification; (vii) closing conditions and covenants; (viii) prorations; and (ix) closing costs. Purchase and sale agreements also include schedules, exhibits and ancillary agreements.
If the buyer is using funds to purchase the commercial real estate property from a 1031 like-kind exchange, the buyer should include a 1031 like-kind exchange cooperation clause in the purchase and sale agreement. Failure to meet the stringent 1031 requirements can have significant tax consequences for a buyer, including depreciation recapture and inability to defer capital gains tax.
It is crucial that a buyer include a due diligence period in the purchase and sale agreement as a buyer closing condition, which is a period of time that a buyer has to conduct due diligence on the property. It is also common for a buyer to ask for a finance period as a buyer closing condition if it is using a lender to help finance the transaction. Due diligence and finance periods generally range anywhere from 30 – 60 days and can either run concurrently or consecutively to each other. Longer or shorter periods of time can be negotiated depending on the parties’ needs.
If a seller requires an earnest money deposit from a buyer, the earnest money deposit will generally become non-refundable after expiration of the due diligence and finance periods.
3.) Legal Due Diligence
Legal due diligence in commercial real estate transactions is the process of investigating and evaluating a property in connection with a proposed acquisition. Legal due diligence in commercial real estate transactions can be extensive or narrowly tailored. The nature and extent of a buyer’s due diligence investigation will depend on the size and type of the property being acquired and will usually include: (i) a review of the property’s leases and other agreements; (ii) a physical and environmental inspection of the property; (iii) title, survey and zoning review; and (iv) a review of the property’s financial information.
By conducting proper and adequate legal due diligence on a commercial real estate property, the buyer will become aware of all material facts and risks regarding the property.
At Dawisha Law, PLLC, we conduct thorough legal due diligence in commercial real estate transactions so that our clients are able to make informed decisions regarding the properties they are acquiring.