10 Legal Strategies for Selling Commercial Property At Top Dollar and One Essential Tip for Buying

November 9, 2018

By Erik Newman*

New Hampshire commercial real estate trends demonstrate stability in vacancy rates and sustained above average demand reflected by low inventory and favorable rents, making commercial and development real estate an attractive proposition for both buyers and sellers.

While effective marketing remains important to achieving the highest selling price, this article offers legal strategies to supplement the efforts of real estate professionals to position sellers to receive the highest and best offers for their property.

Sellers can adopt the following strategies to minimize surprises that are regularly uncovered during a buyer’s due diligence and that can compromise a great offer or even cause the entire deal to implode.

How To Ensure Top Selling Price for Your Commercial and Development Property

1. Identify Permitted Uses. Be knowledgeable of all uses permitted under local zoning regulations as well as uses permitted by special exception or conditional use permit. Tailor marketing materials accordingly to enhance exposure to buyers and developers seeking to achieve maximum value from your property.

2. Recognize Limitations Imposed By Physical Conditions. The counterpoint to the first strategy is to understand the limitations of your property. The presence of wetlands, waterbodies, unfavorable soil conditions, protected wildlife habitat, steep slopes, ledge and other natural conditions could render portions of your property unsuitable or unable to be developed under state law or local land use regulations. For larger development tracts or any property with unique physical features, the assistance of a wetland scientist, and/or soil and wildlife specialist can provide a seller with a clear picture of what portions of your property can support development, utilities and access. That knowledge is essential to effective marketing and to ensure that a purchaser’s development loan appraisal satisfies the lender’s requirements, which may take those conditions into consideration.

3. Understand Land Use Restrictions. Zoning regulations may further limit development potential. The existence of overlay districts, such as for aquifer protection, view shed or historic protection can all potentially trigger enhanced setback requirements or other development restrictions. An attorney can assist with a review of local, state and federal land use regulations to highlight lesser known restrictions which, if not identified until late in the due diligence process, could jeopordize a deal.

4. Highlight Land Use Regulation Opportunities. Local zoning regulations and state and federal laws may offer development incentives that are not commonly utilized or familiar. For instance, some municipalities offer density incentives if a development is designed a certain way or achieves other local master planning priorities. At the state and federal level there are incentives that provide regulatory relief or even tax incentives for certain types of development, such as for renewable energy or historic preservation.

5. Establish Clear Boundaries. If boundaries are unclear, obtaining a current survey and installing perimeter monuments can enhance value, particularly if there are nearby uses or improvements which could raise concerns over possible encroachment or environmental contamination.

6. Give Buyers a Leg Up On Due Diligence. Rare is the buyer who presents an unconditional offer. Seller’s should put together a due diligence package including records of improvements and all associated permits and approvals, any contracts that will be assigned and any environmental, building or engineering due diligence that was performed in conjunction with the Seller’s acquisition or during its ownership, such as in conjunction with loans. This will expedite the buyer’s own due diligence and help flush out issues that could lead to renegotiation of contract terms or termination of the purchase contract if discovered later on.

7. Tackle Leasing Issues Early. In addition to having copies of any leases included in a seller’s due diligence package, sellers should have a plan for leasing contingencies. If the property’s value lies in delivering the property vacant of all or key occupants, start those conversations with tenants early. Negotiating exit terms with a tenant who knows the property is under agreement puts the seller in a compromised bargaining position. If value lies in existing rents, review leases and make sure they are freely assignable by the landlord and require tenant to attorn to a new owner and subordinate to their lender. If those terms are missing, try to amend the leases before the property goes on the market.

8. Don’t Be Caught Off Guard By Title Issues. Sellers should have a clear understanding of the condition of title to their property and may consider having a title update performed if planning to list a property for sale to identify any new matters that may have arisen since they took ownership. Sellers should not rely exclusively on the fact that they took title under a warranty deed to resolve any title problems that may be discovered. Resolution under warranty covenants often requires lengthy and uncertain litigation and a buyer may not stick around. Even if a buyer isn’t concerned with a particular title issue, their lender is likely to be more conservative and require any clouds on title to be resolved. If title issues are identified but cannot easily be discharged, explore whether an attorney’s relationship with a title insurance company can obtain a commitment to issue identified risk coverage endorsement over encumbrances.

9. Identify Third Party Rights. Develop a strategy to deal with any third party rights in the property, such as under a right of first refusal or access or other easements across the property which could interfere with a buyer’s use or development plans. Rights of first refusal and options tend to impede offers. Therefore, sellers may seek to negotiate a release before putting the property on market. Access easements and rights-of-way may be released or relocated to a less impactful location, but the best time to start those negotiations with the holders is before the property is listed for sale.

10. Fine Tune Your Purchase and Sale Agreement. So called “standard” purchase and sale agreements may have glaring omissions or ambiguities that can derail a transaction, cause a seller to accept less of the purchase proceeds or even result in litigation. Pro-ration of expenses and taxes are frequently overlooked terms, particularly where amounts cannot be ascertained by the closing date. A purchase and sale agreement should clearly address allocation of taxes and expenses and include procedures for post-closing reconciliation and reimbursement, if necessary. The rights of buyers and sellers under due diligence contingencies and with respect to deposit monies and termination rights requires careful attention in drafting and is frequently neglected in boilerplate agreements. For occupied properties the treatment of rents and security deposits must be properly addressed to ensure compliance with laws protecting the rights of tenants. Sellers should have a customized and carefully drafted purchase and sale agreement template on hand before the property is listed for sale so that the seller can quickly respond to an offer without missing or compromising critical contract terms.

Buyers May Also Benefit from These Strategies

If a seller has not addressed any of the above strategies, potential buyers should do so themselves, and use any deficiencies or omissions as leverage in negotiating purchase terms.

Remember, these strategies are most effective before the key terms of the deal have been struck. Prepare early and thoroughly and position yourself to achieve the best deal possible.

For questions or clarifications regarding this article or for more information about a potential sale or purchase of commercial property, please contact Erik Newman directly

* Attorney Erik Newman is admitted in New Hampshire.

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