7 Important Steps To Take Before Selling Your Commercial Property
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The owner's main goal when approaching a potential sale is to be prepared. A seller's inability to deliver information or documents on time may expose the seller to liability, reduce negotiating leverage or kill a deal altogether.
Here are seven key tips to help sellers stay ahead of the game:
1. Check Title
Obtain a preliminary title report. If there are monetary liens or overdue taxes, pay them (or dispute them if they are not accurate).
"Penalties may multiply over time and unpaid monetary liens indicate to buyers that the seller is under financial stress or unable to manage the property, which will weaken the seller's bargaining position," Liner LLP associate Alon Lagstein said.
Look for notices of pending lawsuits and get an attorney's help to have them expunged, withdrawn or settled. This can take a long time, so begin early. Check for any covenants, conditions, restrictions or other agreements that provide for ongoing obligations to determine whether there are defaults and whether estoppel certificates will be required. Finally, the seller should make sure it is the legal owner of the property. If there is a discrepancy in ownership, consult an attorney.
2. Figure Out Who Must Approve The Sale
If the seller owns the property through a limited liability company, partnership, corporation, trust or with other tenants-in-common, consult the seller's organizational documents to determine who needs to approve the sale and how it must be approved. Consider the intended timing of the transaction and whether any required signatories may be unavailable.
3. Plan For Taxes
Does the seller plan to sell the property as part of a 1031 tax-deferred exchange? If so, the seller should consult with brokers ahead of time to discuss replacement properties and consult with an attorney to plan and structure the exchange. There are a number of rules, including time limits, which can have a substantial impact on the sale. Do fewer than all members or indirect owners want to participate in the proposed exchange? If so, it may be necessary to restructure ownership before a sale.
4. Update Lease Files
Unless the seller is the sole occupant of the property, tenants have to be considered. Collect all leases, lease amendments and other modifications, subordination, non-disturbance and attornment agreements as well as all material tenant correspondence. The buyer will need to review these. Audit the lease files. Prepare a detailed rent roll. Search for any tenant (or landlord) defaults and outstanding amounts for tenant improvements, reconciliations or broker commissions.
In certain circumstances, a tenant or ground lessee may have a right of first refusal for the property or a right to consent to the sale coupled with a notice requirement. Identify the process, including timing, for any required approvals. Check the leases to see if tenants are obligated to provide estoppel certificates and subordination and non-disturbance agreements. (They should be.) The buyer may require these from most or all of the tenants. The seller may need to visit tenants in person to get these signed. Tenants that are big corporations or government entities (foreign or domestic) may send estoppel certificates through their legal departments, which can take weeks or months to complete.
"Plan for this by agreeing with the buyer to a form of estoppel certificate in advance with appropriate thresholds and workable timing requirements," Lagstein said.
5. Assemble Physical Due Diligence Materials
Collect all materials relating to the physical condition of the property, including ALTA surveys, as-built drawings, Phase 1 and 2 environmental assessment reports, property condition reports, zoning reports, insurance studies and so on. These may be reports obtained in connection with the acquisition of the property, refinancings or ongoing maintenance. If the property has deferred maintenance, get a professional assessment and estimates.
6. Review Service Contracts
Collect all vendor contracts, including outside property management, landscape designers, engineers, elevator maintenance — anybody serving the property. If the contracts cannot or will not be assumed by the buyer, prepare to cancel them in advance with sufficient time to minimize any termination penalties and to avoid paying for services after the sale.
7. Check Your Loan Documents
If the property is subject to any loans, have an attorney review the relevant loan documents. If the loan is assumable, it may have value to a buyer and the seller may be able to negotiate a higher sale price. If so, review the required procedures and costs of assumption to time the transaction and price them into the deal. If the loan is securitized, prepayment may be subject to complicated requirements including notice and timing limitations. If the loan is subject to any prepayment or exit fees, factor these into the economics of the deal.
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