when sending in offers, short format or full agreement?

Question

Which do you prefer when sending offers in for commercial property, a short format 1 page sheet with summary of terms leaving it to later to draft the full purchase contract, or do you prefer to send in the offer with the full agreement and escrow instructions to begin with?

thanks

Joel Owens · Answer

LOI first.

Try to get due diligence material in LOI phase early for an initial review ( there is a confidentiality component). If no major deal killers that would affect income stream of the property or your desired lending structure are found then the buyers commercial attorney prepares the PSA or the sellers does.

If sellers prepares initial PSA then the buyer might save some initial money but the contract could also be loaded in favor of the seller instead of fair and balanced to start with minor tweaks. The buyers attorney could prepare the contract with more upfront cost to the buyer but have the contract more in favor of the buyer from the start.

How much negotiating depends on the buyer and the seller. I often ask the listing broker or  seller questions directly about their history with buying and selling and past negotiations. I want to see how they have conducted themselves in the past with transactions. You could have  a great lender with a great property and an unrealistic buyer and seller with the transaction process kills ever getting to closing or having a PSA signed to start. Ego's can get in the way and the buyer or seller wants to be right rather than focusing on the goal of buying or selling.

Sometimes a seller or listing broker wants to use a pre-printed form. Typically those are non-optimal as the changes back and forth look like chicken scratch with amendments added on top just to do the PSA when finished. Instead there is a word doc used in editable format where the attorneys (red line) changes back on forth until a final version and clean copy is ready to execute. Process usually takes 1 to 2 weeks for that. Buyers and seller can be traveling, holidays come up,have other deals in process, or it takes a little time to schedule a call with their attorney and more days go by to discuss latest changes ( all these things increase time to finish the PSA).  If both parties are easy to deal with and can negotiate quickly I have seen some finished in 3 to 4 days. It all depends on what is being purchased and the complexity of the deal. If it is a brand new retail center with 4 tenants that is not the same as buying a larger center that the first phase is leased up but the second is under construction so you are hitting a moving target while under contract to close and must constantly make amendments and changes as things happen with the property before closing.

With attorneys and experience over the years I have learned a few things.

1. I don't like attorneys who are DABBLERS. They do a little bit of this and a little bit of that

( commercial,residential, probate, divorce,estate planning,etc.) Basically they are a little all over the place being a generalist in many things to generate revenue but a master of none. They are not an expert in one thing so tend to make mistakes in a transaction that cost the client dearly. One time a client choose this attorney like this without asking me and when it came time to do loan covenants the guy simply did not know how to handle a CMBS type loan. The lenders attorney had to step in at double the legal cost just to help out.

2. Attorneys that do litigation work and transaction work. Experience shows it is hard for an attorney to handle both and junks up the negotiations for the transaction and getting to closing. An attorney like this is constantly preparing for trial work and in court multiple times a week which delays critical responses back to a buyer or seller.

3. I ask the attorney the size of the deals they typical work on and type of clients? If someone is covered up with large corporations and doing this business is an afterthought  where they typically work on much larger deals I want to know that upfront. Example they are working on complex 60 million dollar transactions that take up all their time day and night etc.

4. What are the attorneys fees and how do they structure costs for their junior attorneys and paralegals ( some more complex items or work the senior or lead attorney will do and the delegate other items to their team to complete) ? Some attorneys love to create problems and run up charges. They put their own needs to make money in front of what is best for the client. When I find an attorney that is very good and reasonable I keep them in my system for future use.  The awesome attorneys realize what is important and point that out to their clients but keep the ball moving to the goal line.

I find litigation attorneys are used to negotiating to the ultimate degree and get stuck in the minutia too much as they can't get out of (court mode).

So I look for ( no litigation work, focuses on commercial transactions only, has deal experience in asset class type and deal size we are doing, reasonable with fees and understanding clients goals to keep costs low, team player and not full of themselves ( a heart to serve ).

When I find these things it tends to be a positive experience. In the past when all of these things do not come together you can have problems.

No legal advice given.

Jessica Zolotorofe · Answer

Definitely term sheet/letter of intent. Just be careful that it expressly states that it is not binding and is subject to attorney review and mutually acceptable contract. Without specific language to that effect, LOIs are binding in some states.

Every deal is unique, so sharing a "form" contract is never a good idea and you don't want to pay legal fees to have a deal specific contract drafted before your offer is even accepted and business terms are agreed upon.  The LOI itself can say that your attorney will prepare the initial draft of the contract, though, if you prefer to use his or her form.

Rick Ferguson · Answer

I always do a full agreement, that way I am not negotiating 2 documents ( 1st LOI then Contract) and I control the contract document and language. I believe it also shows we are serious.

That just me.

Ralph C. · Answer

we initially do an loi (with careful verbage so as to not make it a binding agreement) when making offers, then after agree ment submit contract/purchase agreement (not a gar form) drafted by our real estate attorney who also happens to be a professor at Emory law school.

Joel Owens · Answer

I don't use ABR forms. Those are basic and boilerplate.

When my clients are buying 5,10,20 million dollar retail centers WE USE A COMMERCIAL ATTORNEY for the purchase and sale and through the process to closing. I tell my clients and buyers to use an attorney. I am there working in unison with the attorney and lender as a team for the client.

If a buyer or seller wants to save money sometimes they try to do things themselves or get the broker/agent to do it. If something goes south your new best friends because the broker/agent is saving them money will be quick to throw them under the bus and blame them for any un forseen thing that comes up.

Upfront on a new clients initial call I tell them they should expect legal fees. Can be anywhere from thousands to tens of thousand and higher depending on what is needed. If they will not engage an attorney and want to do all of this wacky stuff I won't work with them.

Bill Gulley · Answer

Depends on the size and scope of the subject property, larger deals generally begin with a LOI then bloom, smaller deals that don't require 8 or 10 weeks of due diligence, just send the contract. :)

Carlos Flores · Answer

LOI's are typically used.

Jessica Zolotorofe · Answer

@Rick Ferguson That is great for residential if you can get it. A lot of the standard forms require a documented reason and can't be cosmetic or something plainly obvious before you signed the contract, plus the opportunity for the seller to cure if its something you found in the inspection. Then there's also often a financing contingency, but you have to have put forth good faith effort to obtain a commitment, etc. so there is very little room for "cold feet" or opportunity to walk because your lawyer wasn't comfortable with terms of the contract. Commercial, standard due diligence period is probably 30 days, any environmental concerns, need for Phase II, or anything else out of the ordinary at the property we usually push for 45 or 60.

@Joel Owens good advice!

Rick Ferguson · Answer

Understood--please know we typically have a 10-14 day "free look" with a DD period. Buyer can walk for any reason and receive all escrow money ( less $100.00)

Good dialog