By: Robert Bramlette, Income Member
10 issues sellers should remember when negotiating a contract to sell a commercial building are:
- Qualified Buyer: Make certain that the broker is only bringing you “qualified” buyers. You don’t want to waste time and expense negotiating with buyers who can’t get a mortgage.
- Earnest Money: Ask for a substantial amount of earnest money to be deposited with the broker. The buyer will have a larger “commitment” to continuing the transaction.
- Personal Property: Minimize the representations regarding the condition of personal property items that are being included. If possible, negotiate that these items are being taken “as is.” Many buyers will renovate the building after the purchase.
- Tenants: If there are tenants in the building then review the leases. You will need to provide the buyer with a current letter from each tenant that confirms the amount of the security deposit, that there are no defaults, that rent has been timely paid and there are no amendments to the lease. You will provide the buyer with a credit for the amount of the security deposits at closing. If one or more leases end between the date of the contract and the closing date then specify what lease terms are acceptable to the buyer regarding a renewal of the lease. If the sale fails to close you don’t want to have a vacancy.
- Mortgage Contingency: Specify the interest rate, points and the number of years that the loan will be amortized so the buyer doesn’t have a “technical” out if interest rates go up.
- Prorations: Real estate taxes, rent payments and building expenses should be prorated as of the date of closing. Since real estate taxes are paid a year late in Cook County, and since these taxes are expected to increase each year for at least the next few years, the buyer may seek to have the taxes prorated at an amount in excess of 100% of the most recent tax bill. Some buyers ask for 110% of the most recent tax bill. If a building service contract terminates after the real estate contract is signed, but before the closing takes place, then include a provision in the real estate contract that the building service contract will be assumed by the buyer.
- Professional Inspections: Allow a reasonable amount of time to have the building professionally inspected. Consider including a provision that the building is being sold “AS – IS.” If the building has a “new” roof, HVAC system, etc.; then provide the buyer with the warranty information. Also, provide the buyer with any instruction manuals.
- Governmental Compliance: The building should be in compliance with the local code, and all permits should have been obtained. Some municipalities require permits for signage. If the building is not in compliance then consider giving the buyer a credit for the work to be done. In the event that the cost of the work runs over the amount of the credit the buyer will be responsible for that amount. Sometimes there are delays in getting the building department to agree that the building is in compliance.
- Survey: If you don’t have a survey that was done within the last 6 months, then you will most likely need a new survey. Consider using the same surveyor.
- Title Commitment and Policy: Specify the encumbrances, easements and rights-of-way that the property will be subject to. The title insurance policy obtained when you purchased the building will list these items as of the time of purchase.
Sellers should work closely with an attorney and other professionals prior to listing a building for sale so that the buyer knows what items the building will be subject to; for example, easements, AS – IS HVAC system, new roof with a transferable warranty, etc. The attorney and other professionals will also assist in preparing and negotiating a contract to sell the building.