The Development Process
· 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
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
· 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
§ 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: 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 Signage revenue
o Name recognition revenue
· 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 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
· 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
o Tax incentives, if available
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
o Boundary survey to determine the size of the parcel, lot lines
o Topography survey- tree survey, wetland survey
· Water rights, environmental limitations
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
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”