Real Estate Transactions
Rider: Spring 2009
1. Introduction of Course and Real Estate Transactions: Why?
Assign: Text: “Preface” (pp. v and vi), 565-567, 655-657, 926-930 and 947-960. Handout materials.
Local v. National
International investment into the USA because the USA has political and economic stability
Real Estate law is local, but the issues are the same throughout the U.S.
The finance market drives investment, and real estate lending is a national market
Real Estate Transactions: Why?
1. Consumer Purposes: Want to USE the property.
Ex: Dell needs warehouses to build computers.
Everyone (including businesses and individuals) needs a place to be.
Trends Today: Big pens with cube farms thus do we need as many office buildings? But in Austin, still building office space.
Also “Hoteling” = accounting firms, a lot of the workers are out of the office, so all of your stuff is on a trolley and call up and say in office on Thursday, Then you are in office 2.132. Thus, your office is like a hotel room. Allows the firm to office more employees.
2. Investment Return = Make Money on Investing in Real Estate.
Very popular right now and has been for the past few years. Not always the case.
Historically, Real Estate has offered bigger returns that the stock market.
See Wall St. Journal Article: USA company chasing European markets for the high returns.
Also, international flavor of this article. American companies investing in Europe as European companies invest here. Runs both ways.
3. Diversity
Multiply Asset Classes: “service offices” (aka “executive suite); elderly housing; student housing; mini-warehouses (storage), very profitable!
Review:
So, people invest in real estate in order to: use the property, make money (higher returns), reach international markets, and to diversify (there are all sorts of commercial real estate).
Real Estate does have its ups and downs—independent of the stock market.
Can use Real Estate though to counter stock market investments.
4. Inflation Hedge
High-inflation of Nixon and Carter Presidency (20%); today it is mild in the USA, unlike in Argentina.
So, Dad’s generation wants to have real estate to protect against inflation (want to put capital in real estate).
Unlike bonds, rents are protected as well because at the expiration of the lease the rent can be re-negotiated.
AA-Statesman Article (12/24/06): there is a lag time with apartments; want to own it when supply is short.
But, real estate does not always go up! Ex. 1974, 1985 (overbuilt) = commercial real estate does have its ups and downs.
5. Favored Class under the Federal Tax Code
Individuals may deduct mortgage interest.
Corporations pay less taxes on revenue stream from real estate.
Depreciation of commercial real estate: can take a deduction.
Who are the Players/Does the transactions?:
o See AA-Statesman Article (12/24/05)
o 1. Users
· Ex: Dell warehouse
o 2. Real Estate Investors/Equity Players in the Commercial World
· A. Pension Funds
o But the number of employees in America using pension fund are dying
o Ex: IBM said no more to pensions!
· B. Life Insurance Companies
· C. Educational Institutions
· D. REITS
o Defined: 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.
o Real people don’t have 10 million dollars to invest in real estate.
o Solution: Real Estate Investment Trust (REIT) which is a company that owns real estate.
o A real person can buy a REIT stock; there are REITS that specialize in hotels or shopping centers, specialize in Florida or California. The REIT provides bite-sized pieces (bite-sized pieces in real estate all over = diversification).
o Like a fund that it aggregates money and buys funds
· E. Investment Houses (Morgan Stanley)
o 3. Government
o 4. Lenders
· Willing to loan money and get returns
· The Lender gets paid BEFORE the equity player = a smaller return but more certainty
· But if a homerun then equity player does better b/c higher risk
· These lenders include: Life insurance companies, brokerage houses, mutual funds (also listed above)
· So, these are both Equity Managers and Lenders = balancing their risk
· Equity guys are looking for entrepreneurs and lenders looking to loan money
· Both are investment devices looking for returns = pools of capital/$$
o 5. Others
· Lawyers, Brokers, Real Estate Agents, Title Co, etc.
· Point: This is a team sport. The lawyer interfaces with all of these folks. Lawyer is the quarterback.
· Lawyer: Uses the legal tools to predict how the system is going to work; we know how it should work, we manipulate the system; we grease the gears (although some say we are the sand). We understand and use the system. We know the law.
· This transactional business yes is national and international, but it is also local.
· What kind of law? Contract law! Not property.
· Property tax = ad valorem tax = finances school and cities
· In Texas, we are heavily property taxed
· In fact, commercial real estate is taxed 2 ½-3% to finance schools
· Texas may end up taxing real estate conveyances in the future as a source of school finance as in Florida. Which is why in Florida, people get around real estate tax by ground leasing.
2. Let’s Make a Deal
Assign: P.C. 5.021 (Supp p. 7) and Business and Commerce Code Section 26.01 (Supp p 17); Supp. pp. 68-78 and Text pp. 2-4 (through “Fourth”).
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
agmt
Benefits: the letter of intent has benefits:
Economically: cheaper and easier way to do business; ability to winnow the real players
Good tool to document where the negotiations stand. Facilitates communication
Protects the seller from the buyer’s reliance
Negligent Misrepresentation: protects the seller if the buyer relies on the letter of intent. The buyer may only recover the reliance damages.
(Amy’s class notes) A Usual Transaction: Outline of How to Play “Let’s Make a Deal”
o 1. Assess need or market
· Lawyer is usually not involved in this
· Dell decides when it needs to have more warehouses
· Also, entrepreneurs are looking/assessing in order to make money, see what tthe market doing
o 2. Search and Haggle/Negotiation
· Sometimes clients do this themselves in residential/housing real estate
· Local brokers know what is on the market
· How do a seller and buyer come to an agreement? This is the part of the haggle where the lawyer comes in
o 3. Contract
· Form contract = p. 18-67 in Supp. (50 pages)
· Signing here: Here the skeleton of the deal is signed and the details will be later fleshed out for the closing
o 4. Feasibility/Due diligence/Review Period
· Period of the buyer “kicking the tire”: checking out the deal
· 1. Arrange Finance
o Arrange finance for a loan
o Usually for 80% of the money needed to finance the project
o Or, the prior owner already has a loan in place and it will be taken over by the buyer
· 2. Inspections and Verifications
o Lawyers at this step check the Survey
o 5. Closing (“escrow”)/closing(s) for the Purchase/Sell
· Texas (informal): seller and buyer sit at title company and pass around papers and sign them
· CA (more formal): sets out terms in excruciating detail; title and escrow are separated out (but in the same office)
o 6. Financing for the Purchase
· TX: Likely to have 2 closings because also doing a Closing with the Lender
o So, Lawyer is quarterbacking 2 transactions:
§ 1.Property
§ 2. Loan
o 7. Operate
· Client now owns: either going to use it or lease it
· 1.Leases: Commercial real estate owner (realistically): will be leasing the property
o Commercial leasing is unlike bonds and stocks (inactive), can do it from your easy chair; rather active (more effort and recently more money), putting in new paint, construction, dealing with contractors
· 2. Taxes: TBD
o 8. Sale
· Who wins in this? Hopefully our client and us, too.
