Stan Mullin specializes in the sales and leasing of industrial land and buildings in southern Orange County, California.

His areas of expertise include: entitlement, contract language, construction schedules, development, assessment district and community facility district bond financing and he specializes in corporate real estate matters.

As A Seller – Consider These Provisions

Author: Stan Mullin, CCIM, SIOR

When selling commercial property, it is vital that you seek the counsel of experts in a variety of fields, including commercial real estate law, tax, title and hazardous materials to insure that you are performing your obligations and that your rights are protected. Following are a few provisions that you should consider including in your agreement:

Property Description – Insure that along with the complete property address, that you include the county assessor’s parcel number and a complete legal description. Initially, before you have agreed upon all of the business terms your real estate broker can obtain the legal description from the title insurance company’s customer service department. Prior to the opening of escrow, the title officer assigned to your transaction will confirm the legal description and attach a parcel or civil engineers map that your attorney should insure is included in the purchase and sale agreement. It is not uncommon for disputes to occur on the subject of the property being transferred because care was not taken to insure clarity of description.

Description of the Parties – Always make sure that the selling and buying entities are clearly and accurately described in the agreement. As a seller, you will want verification that the buying entity is what they purport to be (LLC, corporation, general partnership, etc.) and insure you know a) their source of funds and b) the status of their financing.

Price – Insure that you state the full transfer price in your agreement in lieu of using the per square foot amount. If there is any confusion in the size of the property, this step will help mitigate the likelihood of litigation.

Deposit – It is protocol in southern California to obtain a deposit from 2.5%-5% of the purchase price at the opening of escrow or on the date the agreement has been fully executed. Typically the buyer will have an initial period of 21-45 days during which he or she will determine if the property is suitable for their purchase. As the seller, you should provide the buyer, prior to the beginning of this review period, all information you have pertaining to the property. Construct the language in your agreement so that if the buyer does not communicate any dissatisfaction with the property to you by the end of their “review period”, that the deposit is either released to you or at a minimum becomes non-refundable to the seller, excepting in the case of the seller’s default.

Funds At Closing – Your agreement should state that all of the funds required to close the sale should be deposited with the escrow agent at least two business days before the scheduled close date. This will provide escrow sufficient time to complete the closing / settlement statement, allocate the funds to pay off any existing demands (loans, construction liens), etc.

Settlement Statement – Always ask for and review a preliminary copy of the closing statement and approve the final statement before the close. This is a critical step to insure that you are receiving all of the funds to which you are entitled, before consummation of the transaction.

Escrow & Title – Always compare the prices quoted by the title officer and escrow agent and obtain references for each. As with any profession, I do not recommend that you select you service provider based upon price, but you should know in advance the expected cost, that it is fair to the market and that they are people that will provide you with excellent service. If the buyer asks you to incur the cost of an ALTA owner’s extended policy, I recommend that you only pay for the cost of a basic CLTA owner’s policy and require that the buyer pay for any premiums above that amount as required by the ALTA extended policy (extended policies, whether CLTA or ALTA often include a civil engineer’s survey of the property which commonly can run from $3-$10,000).

Title Report – Have your attorney review your title commitment and provide you with his or her comments and a summary description of what it covers. Having a commitment for title, versus a preliminary title report is important because the title insurance company will typically not be bound by any of the terms in a “prelim”, whereas they are incurring liability when a “commitment” is provided.

Tax Certification – Insure that forms dealing with IRS Code 1445 and 1099B and those that deal with state requirements are executed as a part of the transaction. These forms deal with the national status of the seller and if he is a foreign or domestic entity. If the seller is foreign, there are certain withholding requirements placed upon the escrow agent or the buyer, until such time as the taxing authorities have received full payment of any taxable income.

Trade – Ask your advisors if you should trade your interest in the property you are selling into another property. If so, make sure that your agreement states that you plan on effecting a tax deferred exchange (1031 and 1021 are the most common) and that the buyer will cooperate, without cost, with your efforts to make the trade. Typically, you will have 45 days from the close of escrow to identify the properties that you are considering for the exchange and 180 days to complete the trade into one or multiple properties.

In all cases, review the specifics of your transaction with your legal, tax and real estate advisors before you commit to any transfer. Next month’s article will deal will similar issues from the buyer’s perspective and subsequent issues will deal with each side in more detail.

Stan Mullin, SIOR, is a Senior Vice President in the Newport Beach office of Grubb & Ellis and specializes in corporate real estate matters. You can learn more about his firm by looking up www.grubb-ellis.com and he can be reached at  stan@mcareceiverships.com.