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October 18, 2017

Best Practices: Tips When Reviewing Commercial Real Estate Purchase Agreements

by Michelle Sergent Kaas

Here are some recommendations to assist with your review of commercial real estate purchase agreements:

– Check the purchase agreement to make sure that the buyer on the purchase agreement is your borrower and that the entity name matches the entity documents.

– If the parties are attempting to assign the purchase agreement to your borrower, then make sure that the terms of the purchase agreement allow for such an assignment. If not, then the parties should enter into a new agreement with the proper entities.

– If you notice additional names on the purchase agreement, ask questions. You may discover that you need to perform an affiliation analysis or add additional borrowers and/or guarantors to your loan.

– Obtain a signed purchase agreement as early as possible to minimize potential issues between the parties.

– Review the vesting deed to confirm that the seller listed on the purchase agreement matches.

– Consider requesting copies of the seller’s entity documents and certificate of incumbency to ensure that the correct people are signing on behalf of the seller.

– Do you see any references to a trust or a condominium association? If so, request copies of the trust agreement or condominium by-laws. Obtain these documents as early as possible as the parties may need to obtain approval from the trustee or the condominium association.

– Look for any right of first refusal referenced in the purchase agreement. If there is a right of first refusal, the parties will need to obtain a waiver from the party who holds that right.

– Although typically found in title searches, deed restrictions or restrictive covenants may be found in purchase agreements. The SBA frowns upon property restrictions as they may limit the borrower’s or successor’s use of the property, negatively affect the property value and/or minimize the ability to sell the property in the future.

– Keep an eye out for any references to reversionary interests or buyback provisions. For example, a developer may attempt to add a provision to the purchase agreement allowing or requiring the developer to regain the property if construction is not started and/or completed within a certain amount of time. It is often necessary to have any such provision stricken.

– You should look for any references to existing leases in the purchase agreement. A long term lease to a third party tenant could hamper the borrower’s ability to use its own property, sell the CRE and/or preclude the borrower from meeting the SBA occupancy requirements. If the borrower informs you that the property will be 100% owner occupied, but the purchase agreement references existing leases on the property, then you will need to investigate further to determine who the tenants are, how much square footage they occupy and how long they will be entitled to remain on the property.

When analyzing these types of provisions, lenders should use commercially reasonable and prudent practices. As always, lenders need to make sure that all of the agreement’s terms are consistent with the credit approval, the SBA loan authorization and the current SOP.

For more information on reviewing commercial real estate purchase agreements, contact Michelle Sergent Kaas at (267) 470-1167 or at mkaas@starfieldsmith.com.