Real Estate Transactions Outline
Rider
Local v. National
International investment into the U.S. because political and economic stability
Real Estate law is local but issues are the same throughout the U.S.
Finance market that drives investment and real estate lending is a national market
Why do Real Estate Transactions
Consumer Purposes: Population growth drives real estate; everyone (including businesses and individuals) needs a “place to be”
Investment Desire: market driven; people are investing in real estate b/c
Higher Return: perhaps reflection of the perceived increase risk of RE investments
Diversity: real estate provides diversity
Inflation protection: unlike bonds, rents are protected as well because at the expiration of the lease the rent can be re-negotiated
Tax Advantages
Individuals may deduct mortgage interest
Corporations pay less taxes on revenue streams from real estate
Who does transactions?
Entrepreneurs: individuals, small, and large businesses
Governments:
Corporations
Institutions & Investment companies
Real Estate Investment Trust (REIT): securitized corporate owner invests in RE. An individual may use this as a device to invest in commercial real estate without buying or wholly capitalizing the investments.
RE Transactions: It is a Team Sport: Real Estate lawyers interact with other business professionals (i.e. financing entities, tenants, title companies, engineers and surveyors, brokers, insurance agents)
The Basic Real Estate Transaction:
Find an Opportunity
Make A Deal
CONTRACT
Feasibiltiy Study or Due Diligence
CLOSE
Find the Opportunity: looking for the suitable property
Willing buyer and willing seller must find each other
RE Brokers: bring buyers and sellers together facilitating the process
Request for proposals via a publication
Request for proposal: method of advertising/solicitation so that willing buyer and seller may be brought together so that negotiations may begin
Usually a request for proposal an offer will be made
Negotiation/Haggling: usually done in an informal way
Brokers can facilitate discussions between the buyer and seller (“shuttle diplomacy”) to arrive at the formality of an offer
Exchange of information
Non-disclosure or Confidentiality Agreement: contract that the materials and information exchanged will not be disclosed
Make a Deal: comes after negotiation and documentation
Letter of Intent
Contract: formal agmt to buy and sell
Statute of Frauds: basis for a RE transaction
Parties à Property à Price
Due Diligence Period: stage of the transaction where the buyer has the opportunity to check the property. (i.e. building inspections, checking the rent records)
Arrange financing, architectural improvements, ect.
Contingencies and Conditions
Conditions Precedent: conditions that must occur before the deal will go through
Conditions Subsequent: if triggered they will terminate any duties in the K
Closing: completion of the transaction; exchange of payment for deliver of the deed
Physical Exchange: i.e. traditional “table closing”
More common in RE transactions b/c Title Companies tend to do things this way; everyone will sign and the title company will issue the check
Escrow Agents and Escrow Company Closing: escrow agents collect from both sides and then wire the money to the seller and send the title to the purchaser
Common in commercial transactions
Entering the Transaction Process:
The Lawyer’s Role in the RE Transaction – Lawyers have knowledge of the law and can predict what the courts will do. A client may decide to bring the lawyer in at any time during the transaction. They may consult early, or just have the lawyer draft the contract after all the details are already hammered out.
Professional Responsibility: lawyers must avoid undertaking transactions where conflicts of interests are present (ex: representing too many parties in the same transaction …unusual to represent both B & S, but possibly B or S and the title co.)
Contract Review: Real Estate Transactions involve basic contract law.
Elements of an Enforceable Contract:
Offer & Acceptance – intent of the parties to be bound.
Consideration – There must be consideration for an enforceable contract (even if it is just a promise to pay).
Capable Parties
Legality of Subject Matter
Real Estate Transactions fall w/in the STATUTE OF FRAUDS, so agreement must usually be in writing and describe parties, prop, & price.
Do not have to agree on everything in a K to have a fully-enforceable/legally-binding agreement.
No requirement to be Extremely Detailed – could theoretically be on a cocktail napkin (see HO—“Elaboration of a Cocktail Napkin”)
K is unenforceable if it is unsigned or if there is no intent to be bound
*Details are desirable, however, b/c they prevent misunderstanding.
Dealing w/ Whether it’s a K: intent to be bound is a jury issue … fraudulent inducement, negligent misrepresentation (just gets $ back), failure to negotiate in good faith (although in TX, good faith req only after cross threshold of having an enforceable K)?
· Letter of Intent /Memorandum of Understanding: LOI plays a valuable role in conducting business transactions. The letter of intent gets parties think
estate or only 2/3.
Joint Venture: general partnership for a limited purpose.
Apply same ROL as the general partnership
Clients will use joint venture in a different way and the lawyer must determine what business association is desirable for the venture.
Limited Partnership:
Limited partner: limited liability while shares the profit with limited role
No authority to sign and bind the partnership
Only General Partner: may sign and bind the partnership in a real estate contract
Until the last year Texas franchise tax did not tax limited partnership
Corporations: Profit and non-profit
Board of Directors give the officers authority to sign into a binding agreement. Officers have the power to enter into binding agreements while Board of Directors simply gives the Officers the power to enter into a binding agreement
Shareholders elect the board of directors that authorizes the officers to act
Non profit does not have stockholders, it uses the income to its purpose. The entity is not free from federal or state income taxes.
Limited Liability Company (LLC): unlike most states, Texas taxes the LLC by franchise tax
LLC has members who are the ultimate owners and agreements can be made among the members.
LLC questions:
Who is the manager à who has signature authority to bind the LLC?
Manager has the authority, but who grants him the authority to bind the LLC
**Ask the other party’s lawyer for a legal opinion to assure that the proper party has binding party
Aliens: may enter into binding real estate contracts and therefore, may buy and sell real estate
Executors of Estate/Estate Trustees/Guardianships (Fiduciary Representatives):
Executors/Administrators: executor/administrator has to sign. Get the “Letters Testamentary” from a probate ct stating that the executor/administrator is qualified to so represent an estate.
Trustees: trustee must sign: whether the trust is testamentary or a inter vivos trust (beneficiary’s signature is not required b/c beneficiary has no power to bind/manage the trust).
Guardianships are treated the same way except they are ct-supervised unlike independent trustees.
Express Trusts: Inter vivos trust, testamentary trust can give capacity to buy and sell property. Trustee can buy or sell the property, no the beneficiary.
