How Do I Finance a Commercial Acquisition?
Finalizing a purchase agreement for the acquisition of commercial property can sometimes involve extensive negotiations and hours of work. Compiling all the business and legal terms into one document, and then making that document palatable to both the buyer and the seller, is no small feat. While oftentimes executing the finalized purchase agreement represents the biggest hurdle for a seller to clear, this usually is just the beginning for the buyer. Typically, the buyer has many months of due diligence ahead (along with thousands of dollars in costs), including obtaining a Phase I Environmental Site Assessment (and perhaps a Phase II), reviewing title and survey matters, obtaining governmental approvals for the project or the anticipated future uses of the site, and reviewing any documentation associated with the property itself (i.e., existing service and other contracts, permits, leases, plans for the site, etc.).
Additionally, unless the buyer is independently wealthy or the transaction is being financed by the seller pursuant to a contract for deed or similar mechanism, the buyer will need to obtain financing to purchase the property. Unlike a typical residential transaction where there are only two primary documents (i.e., the mortgage and the promissory note), along with a few other secondary documents, a typical commercial transaction may involve a dozen or more documents that the buyer needs to either sign or provide at the closing. Consequently, in addition to negotiating with the seller, the title company and perhaps local government officials, the buyer also needs to review and negotiate several documents with its lender.
Typical Loan Documents for Purchasing Commercial Real Estate
Set forth below is a list of loan documents that may be included in a “typical” commercial real estate transaction. Of course, this list is not intended to be all-inclusive, but it may serve as a good starting point.
- Loan Commitment Letter
- Loan Agreement
- Promissory Note
- Security Agreement
- Financing Statement
- Assignment of Rents
- Mechanic’s Lien and Environmental Indemnities
- Certificate of Good Standing of Borrower Entity
- Borrower’s Organizational Documents
- Borrower’s Authorizing Resolutions
- Subordination, Non-Disturbance and Attornment Agreement
- Opinion of Borrower’s Counsel
Note that items 4 through 7 can be, and oftentimes are, contained within one document that is recorded in the real estate records of the county where the real property is located. Although the negotiations surrounding many of these documents typically begin with the lender presenting its standard “form,” all of these documents need to be reviewed and analyzed carefully in order to ensure that the terms reflect the unique characteristics of the particular transaction and to ensure that the client’s interests are advanced as much as possible.