Property Acquisition Process, Due Diligence, and Closing Issues Course: Building Design Typologies and Real Estate Principles (Professor Bing Wang) Harvard.

Property Acquisition Process, Due Diligence, and Closing Issues

Course: Building Design Typologies and Real Estate Principles (Professor Bing Wang)

Harvard Graduate School of DesignFebruary 10, 2011

Peter Feuerbach, [email protected]

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Topics

- Purchase Documents

- Due Diligence

- Closing on Property and Financing

- Green Building and LEED (time permitting)

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Purchase Documents

- Term Sheet and Letter of Intent - Offer to Purchase- Purchase and Sale Agreement (P&S) - Option to Purchase- Right of First Refusal and Right of

First Offer

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Term Sheet and Letter of Intent

- Non-binding expression of the interest and intentions of the possible Seller and possible Buyer

- Form the basis of a transaction - Demonstrate willingness to commence negotiations

and prepare definitive documentation.- Summarize terms to be contained in a subsequent

binding P&S agreement.- Common Terms: Property description, price, down

payment/deposit, due diligence, contingencies, closing schedule; etc.

- Possible Binding Terms: confidentiality, no marketing.

- Parties not bound until they execute binding P&S.

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Offer to Purchase

- A proposal or promise to acquire property, creating power of acceptance in offeree (possible seller); acceptance transforms the proposal/promise into a contractual obligation.

- The specific terms will determine if the offer is binding or not.

- McCarthy v. Tobin, 249 Mass. 84 (1999): SJC holds that an OTP is binding if it describes the property, price, deposit, title requirements, and time and place for closing, even if it is subject to a subsequent P&S agreement. • In such a case, the P&S is merely a formality, just a

polished memorandum of the parties’ intentions.- If the Offer is binding, it is enforceable (e.g., specific

performance by Buyer, liquidated damages (retain deposit) for Seller)

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Purchase and Sale Agreement (P&S)

- Agreement containing the final, binding terms of the transaction.

- Standard forms for residential (e.g., Greater Boston Real Estate Board)

- Commercial Transactions – Often extensive negotiations; longer, specific documents.

- Common Terms: Contingencies on financing, due diligence and permitting; possible price adjustments; title review and cure; representations and warranties; environmental remediation and indemnification; deliverables.

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Option to Purchase

- Unilateral contract where property owner (Optionor) agrees that the option holder (Optionee) has the right, at the holder’s option, to purchase the property.

- Agreement giving the Optionee the power (but not the obligation), for a limited time, to accept an offer to acquire property.

- Common Terms: consideration (option payment), duration, procedure to exercise, assignable (or not), purchase price, closing procedures and requirements.

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Specialized Forms of Options

- Right of First Refusal• Grants to holder the right to match any offer to

purchase made to Seller by an unaffiliated third party

• If not matched, Seller can proceed with the original offer.

• Restriction on marketability

- Right of First Offer• Grants to holder the right to be the first person

who can accept a Seller’s terms of sale.• If not accepted, the Seller can offer to someone

else.

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What is “Due Diligence”?

- “The diligence [or care] reasonably expected from, and ordinarily exercised by, a person who seeks to satisfy a legal requirement or to discharge an obligation”

• Black’s Law Dictionary (8th ed.) (brackets added)

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Possible Due Diligence Subjects

- Permitting- Environmental (Hazardous Waste)- Title and Survey- Financial and Economic- Others as appropriate

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Permitting

- Zoning: M.G.L. c.40A and local Zoning Bylaw/Ordinance• For proposed development: Uses allowed

by right, “special permit”, variance• For existing building and use: Conformity

with use and dimensional requirements (or, pre-existing nonconformity)

- Subdivision: M.G.L. c.41 and local subdivision regulations• Lot division or boundary modifications

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Permitting (continued)

- Wetlands: M.G.L. c.131, §40 and local wetlands bylaw/ordinance

- MEPA: Massachusetts Environmental Policy Act, M.G. L. c.30, §§61-62H and 301 CMR 11.00• Environmental Impact Reports (EIRs)

- Others: e.g., Tidelands and Chapter 91, Endangered Species, discharge permits, transportation permits

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Environmental – Hazardous Waste

- Why is hazardous waste a concern?

- Purpose and considerations

- State “Superfund” – Chapter 21E and Brownfields

- CERCLA – Federal Superfund

- All Appropriate Inquiries Rule (AAI)

- ASTM E1527-05, Phase I Environmental Site Assessment

- Licensed Site Professionals (LSPs)

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Hazardous Waste Liability

– Liability is strict, joint and several• Without regards to fault• Can be liable together, or individually

– Liability based on status as well as actions (mere ownership)

– Cleanups can be expensive, time consuming and disruptive

– Possible litigation and enforcement

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Purpose and Consideration of Environmental Due Diligence

– Negotiate purchase terms (price adjustments, representations, indemnification, clean-up responsibilities)

– Address lender and investor concerns– Obtain liability protection under CERCLA,

by performing “All Appropriate Inquiries” (AAI)

– Support environmental insurance– Timing and Cost– Confidentiality and Notification

Requirements

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EPA’s All Appropriate Inquiries Rule (AAI)

• To establish CERCLA’s landowner liability protections: Conduct “all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial or customary practice”

- Inquire into:• Present and past uses of the

property• Potential presence of environmental

contamination

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All Appropriate Inquiries Rule (AAI)

- Comply with AAI Rule, or follow ASTM E1527, to establish CERCLA’s landowner liability protections:

• innocent landowner (purchase without reason to know of contamination; “unknowing purchaser”)

• bona-fide prospective purchaser (BFPP; purchase with knowledge of contamination)

• contiguous owner (purchase without knowledge of migration onto property)

- Also: “Continuing Obligations” and no affiliation with the liable party (for BFPP and contiguous owner)

- 40 CFR Part 312 (source: 70 FR 66107, Nov. 1, 2005; effective Nov. 1, 2006)

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ASTM International – Phase I ESA

EPA recognizes compliance with AAI Rule by:

– ASTM E1527-05: “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process”

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ASTM International – Phase I ESA

– Includes petroleum products (even if not a CERCLA hazardous substance)

– Does not include: • asbestos material, radon, lead-based paint,

wetlands, regulatory compliance, historic resources, industrial hygiene, health and safety, ecological resources, endangered species, indoor air quality, biological agents, mold

– Does not include “business environmental risk” (e.g., cost of compliance or enforcement)

– Report on Reportable Environmental Conditions (RECs) (i.e., presence of contamination indicating a release)

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Licensed Site Professional (LSP)

- Hazardous waste professional licensed in Massachusetts to issue opinions regarding hazardous waste response actions.

- Privatized, risk-based clean-up process in Massachusetts (unlike other states)

- Clean-up end point: Response Action Outcome (RAO)

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1998 Massachusetts Brownfields Act

- “An Act Relative to Environmental Cleanup and Promoting the Redevelopment of Contaminated Properties”

- Chapter 206 of the Acts of 1998 (44 Sections)

- “Declared to be an emergency law, necessary for the immediate preservation of the public convenience”

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Summary of 1998 Brownfields Act

- Liability Protections

• Eligible person (“innocent” owner)• Eligible tenant (“innocent” tenant)• “Safe harbor” for secured lender, redevelopment

authority, municipality, fiduciary and others

- Financial Incentives

• Brownfields tax credit for response costs• Loans and grants for site assessment and cleanup

(Brownfields Redevelopment Fund)• Environmental insurance (Brownfields

Redevelopment Access to Capital, “BRAC”)

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Title and Title Insurance

- Title: concerns the rights to and ownership in land• Ownership, mortgages, liens, easements,

encumbrances

- Title Insurance: States a fact concerning title to real estate, and protects against challenges to the correctness of that statement.• XYZ Corp. is the owner of the property, and the

insurance company will defend all claims challenging that ownership (subject to the policy’s terms).

• To eliminate a risk (unlike other forms of insurance based upon an assumption of a particular risk).

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Title Insurance (continued)

- Title Commitment: formal document committing the title insurance company to insure the property subject to matters listed in the commitment.• Lender/Loan Policy, Owner Policy, Leasehold Policy• Property covered, including appurtenant

easements (Schedule A) • Requirements for the title to be insured (Schedule

B – Section 1)• Encumbrances and Exceptions from Coverage

(Schedule B – Section 2)• Affirmative insurance and endorsements.

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Real Estate Survey Plans

- Survey Plan shows the location of the land and current state of facts on the ground based on a field instrument survey by a Professional Land Surveyor.• Property boundaries• Utilities• Streets and right-of-way lines• Pavement and parking• Buildings and structures• Easements and encroachments

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Real Estate Survey Plans (continued)

- Standards adopted by ALTA (American Land Title Association) and ACSM (American Congress of Surveying and Mapping)• Professional Land Surveyor (PLS)• ALTA Survey

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Closing

- Closing Agenda, to identify tasks and responsibilities:• Loan documents for property acquisition and

construction (commitment letter, loan agreement, note, guaranty, mortgage, etc.)

• Conveyancing and title issue (deed, title insurance commitment letter, MLC, etc.)

• Opinions (authority, execution, enforceability, zoning, etc.)

• Organization documents (certificate of organization and of good standing, operating agreement, etc.)

• Construction matters (architect and contractor contracts, construction budget and schedule, plans and specs, etc.)

- Closing Binder, the portfolio of executed closing documents on the land acquisition and financing

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LEED® - Leadership in Energy and

Environmental Design - Voluntary building rating system established

by U.S. Green Building Council (USGBC)- To promote sustainable green building and

development practices throughout the commercial and residential building lifecycle:• Design and construction• Operations and maintenance• Tenant fitout• Significant retrofit• Neighborhood development

- Third-Party verification through the Green Building Certification Institute (GBCI)

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LEED® (continued)

- Rating systems for different building types: • new construction• existing buildings (O+M)• commercial interiors• core and shell• schools, retail, health care• homes and neighborhood development

- 100-point scale with 10 bonus points: • Platinum (80 points and above)• Gold (60-79 points)• Silver (50-59 points)• Certified (40-49 points)

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LEED® (continued)

- Five key credit categories1. Sustainable Sites2. Water Efficiency3. Energy and Atmosphere4. Materials and Resources 5. Indoor Environmental Quality

Also: Innovation in Design; Regional Priority; Locations and Linkages (homes); Awareness and Education (homes)

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LEED® (continued)

- Possible Benefits:• Lower operating costs• Better indoor environmental quality (air, light,

temperature)• Faster sales, leasing, permitting• Attractive to tenants (higher occupancy, rent

premiums)

- Professional credentialing managed by GBCI• LEED Green Associate• LEED Accredited Professional (AP) with specialty• LEED AP Fellow

Property Acquisition Process, Due Diligence, and Closing Issues

Course: Building Design Typologies and Real Estate Principles (Professor Bing Wang)

Harvard Graduate School of DesignFebruary 10, 2011

Peter Feuerbach, [email protected]