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Avoiding pitfalls during commercial real estate transactions

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Purchasing or selling commercial real estate can be unexpectedly complex in many ways that are quite different from residential real estate transactions. Michigan business owners who either plan to launch a new enterprise or expand operations will want to be prepared for all the steps and possible pitfalls along the way.

As the due diligence may be extensive, business owners would be wise not to rush this process and risk not getting vital information on title, zoning, or contractual obligations. If they are not aware of local or state laws or environmental risk factors, engaging in a real estate transaction can also put the business at risk. For Detroit area business owners, getting assistance on the contractual aspects of the deal is important to ensure a satisfactory and legally sound outcome.

Agreeing on the LOI and the due diligence period

Among the many steps in the commercial process, the first is the term sheet or letter of intent (LOI) which essentially memorializes the intentions of the named parties and lays out basic business or economic issues that, once signed, are usually not re-negotiated.

During the due diligence period, the purchaser may exercise their right to examine all aspects of the seller and the property, and they may terminate the deal if what they find is unacceptable. The due diligence examination will review:

  • Leases, service contracts or management agreements
  • Title and survey
  • Environmental risk factors
  • Zoning and use
  • Engineering and structural issues

Although the parties may agree to the duration of the due diligence period as part of the LOI, depending upon the results, they may further negotiate in the purchase and sale agreement.

Negotiating the terms and conditions

Among the terms and conditions that the parties will negotiate when solidifying the purchase and sale agreement, the key elements are:

  • representations and warranties, laying out risk factors and clarifying liability and indemnification obligations if there are inaccuracies or breaches
  • covenants establishing obligations for maintenance and repair, insurance, as well as seller release to enter into new contracts
  • closing conditions setting conditions for the buyer to acquire the property and finance along with contingencies
  • prorations and credits

Every transaction will have unique concerns such as industry-specific considerations, state laws or local environmental restrictions, financing sources or other issues. Understanding the process will help prepare the business owner for potential risk while clarifying their goals before they go into the deal.