David Weisman, Esq.
January 23, 2012
It used to be that there were three parties to a typical commercial real estate transaction: buyer, seller and lender. Each has its own interests and requirements which must be met in order to get to closing. The buyer and seller negotiate a business deal that makes sense, and the buyer goes to its lender to get the money.
Now, there is a fourth chair at the table, a new player who directs the details of the transaction almost from the first negotiation. The mysterious fourth party is the seller’s lender. Many commercial lenders are reluctant to take title to troubled property through foreclosure or deed-in-lieu of foreclosure. The seller’s lender fears environmental liability, does not want to maintain and manage property, and does not want to engage in the process of selling property. Many sellers’ lenders are encouraging sellers to seek buyers and engage in a commercial short sale.
The process differs from a residential short sale in many cases, because the seller’s lender has often taken control of the property by means of a receiver, if there is a pending foreclosure action. Seller’s lender imposes its will and its requirements upon the transaction from the very beginning. The contract for sale must be reviewed and approved. Seller’s lender often establishes a minimum price and carefully scrutinizes cost allocations to make certain that its short payoff is maximized.
The seller’s goal is to get released from any personal guaranties and to be rid of the property without too much difficulty. The seller usually realizes nothing from the sale. This evaporates motivation often found in a hungry seller. The buyer expects to make an arm’s length offer for property at fair current value. The buyer may not initially realize that its seller does not have the power on its own to enter into a normal deal.
The seller is reluctant or often refuses to make typical contract representations regarding the operation and control of the property if a receiver has been in place. The receiver refuses to make any representations and warranties, because it is just a hired gun, even though it has had complete control of the property for months. The buyer must be willing to purchase without many typical warranties and representations which are otherwise customary. It may be difficult to obtain tenant estoppel letters, accurate and current rent rolls, historical expense reports, and similar information which used to flow smoothly into the hands of a buyer during due diligence.
Due diligence periods and closing dates are mandated by the demands of the seller’s lender, and both are drastically compressed. Instead of a typical 45 days to inspect the property and 15 or 30 days thereafter to close, the seller’s lender may insist that a buyer has 10 days to inspect and 15 days to close. The buyer agrees in order to make a deal and the result is a scramble and a closing with less than complete information. Artificial deadlines, like end of the quarter or end of the calendar year, put even more pressure on all of the parties to comply with the demands of the seller’s lender.
The closing statement is subject to the approval of the seller’s lender as well. Each allocation and cost is scrutinized to make certain that the proceeds are maximized. A battle often ensues between the seller and the seller’s lender over project costs which should be paid out to third parties, who have provided goods and services to the property and who expect or demand payment out of the closing proceeds. If the seller is otherwise insolvent, resistance by the seller’s lender may force the buyer to pay expenses of closing of the property that they otherwise would not be obligated to pay.
Miraculously, the deals get closed. The buyers are convinced that the prices that seller’s lender is willing to take to get rid of the problem are low enough to justify the aggravation and additional expense. The properties are selling and the market is improving. Commercial real estate has found life in the new world order, either in spite of or with the help of the fourth party.
David Weisman, Esq. is a Board Certified Real Estate Lawyer at Greenspoon Marder with more than 30 years of experience. He can be reached at 954-491-1120 or firstname.lastname@example.org .
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