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Developing Real Estate
Wayne State University Law School
Nix, Robert R.

Developing Real Estate Transaction
–          Lawyers usually brought in after purchase agreement signed, see if problems with the agreement such as ambiguity.
o   If new construction, residential owners are advised to get lawyers b/c are a lot issues.
–          In commercial arenas, lawyers are used more. We shall prepare first draft and have a lot more control that residential transactions.
o   Brokers are usually matchmakers, get their fee, then step out the way.
–          Address the allocation of risk to identify problems. Communicate well with your clients in transactional practices.
o   Communication is a key b/c things are changed and revised all the time.
o   Waiver of conflicts has to be in writing!
o   It is important to have engagement letter with your client of how much is your retainer, what you going to do for them, etc.
Due Diligence Process
–          What drives Real Estate?
o   Location is very important in Real Estate b/c makes it valuable. Real estate is limited now b/c really don’t make much anymore, so location is important.
o   The User (tenant), someone has to use it to make money on it.
o   Taking raw land and making something out of it and lease it to someone to make income.
o   Leverage- going to leverage the transaction, 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.
§  Ex: think about shopping centers, and strip centers (small pizza shop).
§  Big Box Users: are like Home depot
§  Is this location going to be used by what type of user? What does that user need and want?
·         If a Home Depot they want easy access and close to an expressway.
o   Zoning and Land use restrictions: What can you develop based on zoning?
o   Size of the Parcel: How big is it? How much can it accommodate? Think about parking.
o   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 road, does have close access to freeway.
o   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?
§  What if want to put a big outlet mall, can’t put septic sewer then.
§  Gas and electric are a little easier b/c lines are usually installed on major roads or are available amongst reasonable proximity.
o   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).
o   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),
§  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.  
o   Tenant selection: 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.
o   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.
o   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, 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.
§  What if lender gives only half of what you need, and are short of what you need. Say I have the other 2.5 million, will not get any return unless get users.
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.
o   There are some Restrictions such as pets, size of parcel, zoning.
–          Environmental Investigation of the Property: environmental consultant has to give us a report, which is a background check of the property by a historical check, walk on the property, and search adjacent properties. If they find a problem they will go to faze 2 by checking the property and soil. Usually a 2 step process.
–          What are the permitted uses of the property/Zone: is it zoned for the development at issue?
–          Access to Transit: transportation and access.
o   Availability of Utilities.
o   Check 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.
o   If grocery store look at roof top study, which means houses near.
–          Survey: tells you how much property you have, shows records of easements exactly where they are located,
o   Wetland survey, topography survey, boundary survey, tree survey
–          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 risk of buying property b/c don’t know what is going to happen in future.
o   Condemnation: any pending or contemplated?
o   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 pay 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. 
–          See all contracts parties have entered into regarding building such as maintenance. See if want to keep them or terminate them.
o   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? 
o   See if warranties are assignable.
–          Fixtures: distinguish between personal property.
o   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.
Problem No. 1
–          Make a picture of the Facts.
–          Start with Real Estate:
o   Issue with developer client about title:
§  There is a prior mortgage that creates a problem b/c how are we going to prove mortgage has been paid and get it discharged.
§  Issue where to put roads. Maybe surveyor will help us.
§  The boundary issues about who owns property.
§  Zoning issues: under PUD need special appraisal.
§  Septic tank will not be enough for the whole development. What are some solutions?
·         Have to deal with gas and electric
Problem No. 2
–          Ground Lease: has anywhere from 40-50 years for option to renew. Gov’t, colleges, cities enter into ground lease b/c they last for a long period of time. Ground rent would not be excessive if developer wants to but building on top of it.
o   Mineral Rights
–          The 10ft gaps between the parcels is an issue.
–          Industrial market started to shift away from the city towards 75 near Highland Park and Auburn Hills.
–          Community Planning: Tax based, employment,
–          Is this a pro business community where we want to put our business in?
–          Incentives:
–          Every building over certain size requires a fire protection system which requires water.  
–          Sanitary sewer is a bigger deal if you don’t have it. In this case, the community wanted a lagoon system which is clean and efficient system.
–          Vehicular Access: 

§  If so make an exclusion of prior tenants dealt by with Owner in the Agreement for a specified term.
§  An extension clause by Broker that states if deal closes after specified term and is with someone Broker worked with, still entitled to commission.
·         Be careful of Extension periods and potential buyers/tenants that may have to exclude.
·         See what Owner has done in the past and see if need to attach a list to the agreement of exclusions!!!!
§  Agreements usually don’t say what Brokers are going to do.
·         Want to see what kind of standards you want to impose! See if can terminate the agreement in case of Default. If no description of what Broker has to do, hard to see their performance.
·         Broker needs to be the procuring cause by bringing a Ready, willing, and able buyer in order for commission.
·         If Broker brings a offer but Buyer defaults, still probably entitled to commission even if Seller receives nothing and the property never sold.
·         What if: commission once property is sold? Not clear, still ambiguous.
·         Clear: You get commission once property is sold and closed!!!
o   Listing Agreement: not much negotiation on these. Issue on cooperating Brokers and sharing fee. Can’t split fee with unregistered broker.
§  Write agreement: NO CLOSING NO COMMISION
–          Broker is usually the Sellers Agent. Listing Broker is almost always a Sellers Agent.
–          Tenancy in common: undivided interest in common and everyone has individual slice of the pie.
–          Joint Tenancy: winner takes all, the survivor is the one owning the property. This doesn’t work well for Real Estate Developments.
–          Real Estate went through so many phases b/c it was tax driven.
–          See how to make limited partnership not corporations b/c if viewed as corporation had double tax issue.  Idea of not a corporation but a limited general partnership so had to remove 2 of the 4 elements.
o   Continuity of life: Corporation could go on forever
§  Can have a fixed term so not a corporation.
o   S/h’s had Limited liability
§  Have to keep this
o   Free transferability of interest
§  Tell if you come in the deal, you cant get out unless some requirements are met.
o   Centralized management
§  Have to keep this
–          Made Limited Liability Company (LLC) b/c combined concepts. In real estate arena LLC are crafted more as limited partnerships b/c will have managers that are like general partners.
–          Articles of Organization:
o   Have to get your company name cleared
o   Know if it has limited duration
o   What business purpose is
o   Who resident agent is
o   How is this going to be managed? Statue gives you 2 approaches:
§  1) it is manager managed and will represent limited liability company. Most of the time, the manager will be part of your LLC b/c of fiduciary duty and control. Really don’t want an outside party to be manager.
§  2) Member managed entity. Like a general partnership b/c everyone gets a say so of what’s going on.
o   Gives flexibility to run your entity as you see fit.
–          Operating Agreement
o   Equivalent to Limited liability agreement.
o   Not filed so you can do whatever you want with it, so have a lot of flexibility.
o   The limited liability statute creates defaults, that is if you don’t do certain things in operating agreement, the statute will tell you what to do.
o   As a practicing lawyer: last thing want to do is leave out a clause in the agreement and let statute fill it in.
o   Overview:
§  OA its self has general provisions of the party, purpose, duration, resident agent.
§  Talks about membership interests with a lot of subsets: what memberships are, what kind of capital contribution you have to put in, how admit new members and take out old members.
§  How going to report, financial report to members, and administrative procedures.
§  How we treat profits/losses and distributions.