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Developing Real Estate
Wayne State University Law School
Rattner, Richard D.

DEVELOPING THE COMMERCIAL REAL ESTATE PROJECT

RATTNER

FALL 2016

1. DEVELOPMENT OVERVIEW PROCESS

Real Estate Lawyers

Are usually brought in after Purchase Agreement is signed in order to see if there are problems with the Agreement such as ambiguity. If a new construction process, lawyers have more issues to address.

Brokers: usually matchmakers that get their fee, then step out the way.

Brokers Listing Agreement – employment K defining terms of the broker’s agency w/ vendor

Real Estate Practice is the art of negotiation and being a good drafter (very different from litigation)
Professional Responsibility

Need to know who your client is – this is important because we have developer and entity, investors – need to know you represent. Generally, represent entity in terms of transaction.

CANNOT represent buyer and seller. You have an obligation to the client not to disclose and cannot hide financial information.

Need expertise to handle transactions.
Important to address allocation of risk and communicate well with your client.

“Waiver of conflicts” has to be in writing.

Important to have Engagement Letter w/ client – retainer, what you will do for them, etc.

[Due Diligence]

Due Diligence Process (What drives Real Estate?)

Users dictate the development of real estate. Need to have a user (tenant) to make money

Leverage – take whatever investment developer puts in with whatever investor puts in.
Big Box developer – home depot

Developer needs to look at what his potential user is going to be. What does user need and want?
Types of Development:

Build a suit project: a project designed for a specific user.
Speculative Project: Just build a building and hope to find a tenant later. A business risk hoping for a tenant to come.

Development Team Members
Location is very important in Real Estate b/c makes it valuable (must always be the starting point).
Leverage- the ability to take your investment and put less investment (borrowed money) to make more money. Less money you put as a developer and add it with other things to make money for yourself and others.

Is this location going to be used by what type of user? What does that user need and want?
If a Big Box User like Home Depot, they would want easy access and close to an expressway.

Zoning and Land Use Restrictions: What can you develop based on zoning?

Land Division Act: You can make a number of divisions in a property without filing a plat. The number of divisions is tied with the amount of acres in the property.

Size of the Parcel: How big is it? How much can it accommodate? Think about parking.
Availability of Accesses: As its stand alone principal, helps determine what develop property as. What do you have, a dirt road in front of the property, a 2 lane road or 4 lane-roads; does have close access to freeway?
Available Utilities: one of the biggest cost items you are confronted with. Utilities are not extended to properties that are not yet developed.

Have to look at costs of 3 things: 1) sanitary sewer, 2) storm sewer, and 3) water.

If not water system, can I put well? How much to install a well? Has a development cost to it.
Sanitary sewers are one of the biggest costs, think about treatment plants. Septic sewers?
Gas and electric are a little easier b/c lines are usually installed on major roads or are available amongst reasonable proximity.

Topography and wetlands: Every developer would love big property with no trees on it. A lot of tree ordinances if you tear down a tree must plant another one.

Also if have elevations that go up and down and not flat land, b/c you have to cut and fill the land to have a flat building surface.
Wetlands another issue b/c it limits the size of the parcel you can develop (might even have to get a wetland consultant).

Environmental considerations: Brown filled properties and green filled properties. Have to investigate the property by taking soil samples, look at previous uses (such as 10yrs ago maybe a junk yard there),

Brownfields: sites where soil and groundwater have been contaminated

Tenant selection: Owner’s responsibility to take raw land and make something out of it so someone can lease it to generate income. The single most important thing for a developer is whether a tenant is credit worthy.
Letter of intent: move away from this to actual leases so tenants are liable. If tenants sign lease, there are also many conditions such as developer has a certain date to develop.

Market conditions are constantly changing so drive development.

Brokers: help make deals b/c they bring in users and are matchmakers. A lot of times they work with Developers and are Agents on certain projects. Or other times Broker Protection that allows brokers to bring deals and they get paid.
Pro Forma: an economic evaluation of the project of how much money you need and where it is going to go. What are all the costs to develop, such as soft costs (lawyer, survey, title, land acquisition) then construction costs (hard costs), and then financing costs. Unless you are going to put up all the money, need investors.

How do I cover acquisition and construction costs? How do I get the project paid for? What type of income am I getting from tenant to keep the project going forward (maintaining property, electric bill, operation fee, etc)?
When negotiating with equity partners, the developer has to figure out how going to pay back investors.

If it 100% financed, have to pay that money back to the lender. If reasonable interest rate and market is hot, you still end up with a net cash flow that gives you money that you would make.
LOAN TO VALUE RATIO

Due Diligence in Vacant Piece of Property (Check List)

Title Review: who owns the property, what type of encumbrances on the property we have to deal with such as mortgages, easements recorded against the parties.
Environmental Investigation of the Property: environmental consultant has to give us a report, which is a background check of the property by: 1) a historical check, 2) walk on the property, and 3) search adjacent properties.

If they find a problem they will go to Phase 2 by checking the property and soil. Usually a 2 step process

Zoning Restrictions: What are the permitted uses of the property? Is it zoned for the development at issue?
Access to Transit: transportation and access. Also check availability of Utilities & Minerals
Topography of the land: Cost of land balancing and making site leveled and hire someone to give us a report.
Market Study: nature of use, so look at local property.

If a grocery store look at roof top study, which means houses nearby.

Surveys: tells you how much property you have, shows records of easements exactly where they are located,

Types: Wetland survey, topography survey, boundary survey, tree survey
Sub divisions: will have a lot number associated with it.
Condominium Units: have drawings in Master Deed (unit 6 in XYZ condo)
Meets and Bounds: direction and distance.
Alta Survey: complex survey that includes boundary lines, location of the main building including improvements, location of ancillary buildings, the identification of easements (access rights by service companies such as water, gas, telephone, railways and other utilities).
How many land divisions are available for this property?

Taxes: have to go to municipality/township to see what is going on with property. If special assessment process it is in the public records, if in contemplation process much harder b/c can’t really adjust price and a risk of the buying property b/c don’t know what is going to happen in future.
Condemnation: any pending or contemplated?
Make a litigation search of the property. (lis penden search if buyer/seller fighting)

Due Diligence of Building (hit list)

Compliance with Codes: could be violations that are not resolved, orders from city such as demolition.

Environmental on Building Components: such as asbestos, lead paint, chemicals, cleaning fluids, etc.
Rent Roll/Documents: How much tenants paid for rent, if they have security deposits, term and options to renew, option to buy the building.
Condition of building: want a physical inspection of the building such as roof, plumbing & electrical (does have fire protection system or not, exist of working), heating and cooling, and parking lots.
All K’s previous parties entered into: such as maintenance to know if want to keep them or terminate them.

Elevators: see condition of elevator and what maintenance records are.

Operational history of building: see if enough revenue of building to cover expenses. Operational history tells me gas bills for the past couple of years.
Warranties: Does building have any benefits of expiring warranties? Assignable?
Fixtures: distinguish between personal property.

Determine what you want with the property upfront with the building so no hidden charges at the end.

District: is it historical district that I can make changes to, such as changing the front of the building.

Ethics and Real Estate Practice

High number of malpractice claims.
Self-dealing is prohibited in real estate practice.

Do not represent someone for self-interested reasons

Dual representation

Rule from PR. Do not represent two clients with adverse positions unless

Atty believes representation will not be adverse AND
Each client consents after full disclosure.

2. COMMERCIAL BROKERS

A. Role of Real Esta

agreement

There’s an agreement, but owner can sign with someone else
Owner has reserved the right to sell – they can negotiate with whoever they want
Includes: right to terminate w/ or w/out cause
Whoever brings an acceptable offer first receives compensation
EXAMPLE: seller lists their property with 3 brokers for 100k. Broker1 brings an offer for 100k, Broker2 brings an offer for 110k. Seller goes with Broker 2’s person. He still has to pay commission to Broker 1 since they were the first one to bring an offer AND Broker2 since he used Broker 2’s person

Exclusive Agency Listing à only the broker or the owner can the procure offer, but owner cannot deal with other brokers UNLESS owner pays a commission to the exclusive broker
Exclusive Right To Sell àsame as exclusive agency agreement, but owner cannot sell property herself without paying commission to broker

Broker has sole control and exclusive right to sell property and represent the seller
This is the best one, hardest one to get, but most common

Commission

The listing agreement must be in writing (SOF) to be enforceable and to receive a commission
Broker needs to be the procuring cause by bringing a ready, willing, and able buyer in order for commission
Vendor is liable for a brokerage commission when the broker procures a purchaser ready, willing and able to purchase the listed property on the vendor’s terms, unless the vendor and broker agree otherwise

Agreement could say: commission when sold and closed (i.e. no closing, no commission) à no closing between vendor and procured purchasers, then vendor not liable for broker’s commission
Procuring the purchaser is defined as being the proximate cause of the offer – no sale is necessary, only that an offer be made
Ready and willing means being in a state of mind to make the required offer
Able means financially able — not that you have the cash, but appearing creditworthy

“No closing, no commission” – if there is no closing between the vendor and the procured purchaser the vendor is not liable for the broker’s commission
If broker does something in violation of the listing agreement, the contract is voided & no commission given to broker
Broker usually gets 6%, b/c often splitting with selling broker

Terms and Provisions of the Listing Agreement

Identify broker & owner
Identify property

Legal description & address

Identify nature of engagement

Is this a sale or lease

Identify when the listing begins & ends

Usually 60-90 days

Scope of Agreement à can limit scope of what broker is going to do. If agreement is too broad may have to be limited by attaching exclusions.

Was property on the market before? Has owner talked to someone and but didn’t make a deal?

If so make an “Exclusion of prior tenants dealt by with Owner” in the Agreement for a specified term.

Does owner have multiple listing agreement overlapping in same time period?

Multiple Listing Service – organization run by local real estate broker’s trade group. For purposes of effecting a sale the MLS amounts to a sharing of listings. Broker often can attempt to sell a property for which he has procured a listing himself for a short period (around 72 hours) after which the listing must be submitted to the MLS.

Increases market exposure for property.
Placing offer on MLS may create implied oral agency agreement b/w listing broker and subagent.

Termination

Most agreements are silent & don’t talk about default or termination. Should specify how to terminate and what the cause is (or w/o cause)

Prospective List

Can negotiate for who is on prospect list
Can ask for a monthly report of who the property was shown to