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

The Development Process

Residential Transactions

· Controlled by real estate brokers

· Lawyers only get involved AFTER purchase agreement is signed, if necessary, to do closing and review of documents

· Most sales are existing construction

Purpose of a Real Estate Lawyer in Commercial Transactions

· Lawyer is lead player who deals with all third party consultants

· Structures the transactions

· Negotiates and drafts documents

· Goals:

o Educate your client

o Minimize your client’s risk

· Constant communication with your client is critical

· In commercial arena, majority of brokers don’t understand documentation for the transaction- lawyers play dominant role

Ethical Considerations in Real Estate Law

· Lawyer should not represent both the buyer and the seller, even with meaningful consent of both parties

· If a couple and a company want to buy real estate, can you represent all three parties?

o Probably not. Should only represent the company.

o Can have a knowing waiver of a conflict, but you can’t waive a conflict if a lawyer has confidential information (information that would be critical to that client)

o Chinese Wall: when two partners in a firm put up a ‘wall’ saying that they won’t talk to each other if they are representing both sides of a deal

§ But Nix would never represent both a buyer and seller, a lender and borrower, or a landlord and a tenant

Development Process

· Developer’s goal: develop land and make money by either selling it or leasing it

o What factors affect cost of development?

§ Zoning and land use restrictions

§ Size of parcel

§ Access to roads, highways

§ Cost of utilities

§ Topography- any ravines that must be filled, trucking costs to move soil to other locations

§ Wetlands

§ Environmental- Brownfield redevelopment vs. Greenfield development

§ Parking- costs can be $18,000-30,000 per space

· Build to Suit Project

o Developer has someone who wants a particular project

o Gives developer an advantage because they own and control the property

· Speculative Project

o Developers will purchase the property in hopes that someone will buy it

o Often, tenants want to see what an existing building looks like before they purchase

Pro Forma

· Pro forma: document evaluating how much money you need for the project; plan so investors know what you need

· Costs include:

o Hard costs- construction costs

o Soft costs- permits/fees, broker costs

o Equity component- usually, it is impossible to pay for all of these costs, so someone puts up the costs

§ “OPM”- developers like to use other people’s money

§ Investors (individuals, entities, lenders, mutual funds…)

· Revenue: do a projection as to whether there is going to be a profit made, how it will be made, and who will get the profit

o Rent

o Signage revenue

o Name recognition revenue

Development Team

· Developers like to be full-service- each function is a profit center

· Developers want their own title company, own surveyors, engineers, lawyers, environmental consultants, but usually they just do management, architecture, and brokerage

Single Purpose Entity

· If developer has three projects, and wants each one to stand on its own, and wants entity that owns/controls to be different between projects

· Lenders don’t want outside creditors to force the entity into bankruptcy

Due Diligence

Due Diligence Checklist- Vacant Property

· Get copy of ever document that affects the property

o Title insurance against mortgages, easements, restrictions on development, restrictions on residential use

o Exception document: lists things that property is NOT insured against

· Market study- typically done by title worker and broker

o Population

o Competition

o Crime

· Zoning ordinances- any restrictions?

o Set-back requirements

o Parking requirements

o What must you submit for site-plan approval?

o Does the use require any special permits/zoning variances?

· What do residents in an area want?

· Need an environmental report

· Utilities- What is existing? What is its capacity? Availability?

· Access- roads, railroads, airports

· Entitlements

o Tax incentives, if available

o Mega-grants

o Brownfield grants

· Tax rates of land

o Special assessments (check through governmental agency)

o Pending special assessments

· Delays- union and labor issues for construction

· Survey

o Boundary survey to determine the size of the parcel, lot lines

o Topography survey- tree survey, wetland survey

o Easements

· Water rights, environmental limitations

· Liens

o Are there mortgages, construction liens, encumbrances, non-payment of association dues…

o Adverse possession liens/ boundary disputes

§ Need a physical inspection of the property

o Land contract sales that have not been recorded

o Tax liens against seller- IRS has a global lien against people

o Litigation Searching

§ Has seller been involved in any litigation?

· Governmental Actions (eminent domain)

· Water and soil borings- is there well water or city water?

· Land Division

o How many parcels must you buy? Can you divided up parcels or assemble them?

§ Land Division Act/ Subdivision Control Act

· Mineral Rights- Oil and Gas

o What are the rights? Who has the

isting Site

o When the commission is payable- MOST IMPORTANT

§ In MI, can’t recover a brokerage commission if there is no written brokerage agreement

o Commissions- contingent upon finding a satisfactory buyer for the sale; usually a 6% commission (today, broker bringing buyer to the table gets 4% of this)

· Specify protective period- under what circumstances broker can earn a commission (send out marketing materials, engage in negotiation, etc.)

o Have broker report everything they did

· When the listing begins and ends- usually 60-90 days

Types of Listing Agreements

· 1) Open Listing: broker can procure an offer, but owner still has the right to sell the property herself, authorize other brokers to sell it, or terminate the agreement

o Broker wants an open listing because:

§ He has the inside scoop with the owner/developer

§ Brokers want as many listings as possible

o Owners right are not bound to take any offer that the broker brings

o Termination- brokerage agreement usually ends after 90 days

· 2) Exclusive Agency Listing: broker can procure an offer, and the owner can sell herself or take property off market, but owner can’t deal with other brokers

o Termination rights very important if you are representing the owner

o Broker brings a “ready, willing, and able” buyer; broker also says they are the “procuring cause” because they procured a buyer

· 3) Exclusive Right to Sell Listing: only broker can procure an offer; owner can’t deal with anyone else or negotiate a deal himself

o Right to sell: If broker brings in deal at the price/terms agreed upon, conflicting case law as to whether the owner is obligated to sell

o Clarify owner’s revocation/termination rights

§ “Time is of the essence” because you are moving through these transactions quickly.

§ Problem: If you loose your financing.

o When is the commission earned? When is commission paid?

o Who has the risk that the buyer won’t close?

§ “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

§ Broker’s lawyer will say: “if seller breaches and doesn’t close, broker will still get commission”