CURRENT MARKET TRENDS IN NEGOTIATING THE PURCHASE AND SALE OF PROPERTIES

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CURRENT MARKET TRENDS IN NEGOTIATING THE PURCHASE
AND SALE OF PROPERTIES Is it a Buyers
market? How is the liquidity crunch affecting
the purchase and sale of commercial properties?
Strategies in negotiating purchase and sale
transactions How do you come out ahead of the
pack in bidding for properties? State and Local
Issues Top 10 issues negotiated in Purchase and
Sale TransactionsFIFTH ANNUAL WINTER FORUM
ON REAL ESTATE OPPORTUNITY PRIVATE FUND
INVESTING January 23-25, 2008Laguna Beach,
California
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Panelists
L. Bruce Fischer (Moderator) Partner Morgan, Lewis Bockius LLP Telephone No. 949.399.7145 Email bfischer_at_morganlewis.com Andy Crews Chief Investment Officer Redhill Realty Investors Telephone No. Email
James Chiboucas Vice Chairman KBS Realty Advisors Telephone No. 949.417.6555 Email jchiboucas_at_kbsrealty.com Richard Ackerman Chairman Big Rock Partners Telephone No. 310.734.2351 Email rackerman_at_bigrockpartners.com
Brian Aronson Partner Mayer Brown LLP Telephone No. 213.229.5151 Email baronson_at_mayerbrown.com Eric Stern Partner and Real Estate Practice Leader Morgan, Lewis Bockius LLP Telephone No. 215.963.5178 Email estern_at_morganlewis.com
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I. Is it a Buyers or Sellers Market?

• Cap Rates
• Due Diligence Periods and Closing Dates built-in
  extensions
• Up front hard deposit money
• Financing Contingencies
• Loan Assumptions
• Defeasance Cooperation

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II. How is the Liquidity Crunch Affecting the
Purchase and Sale of Commercial Properties?

• Available financing Is financing available?
• Terms of Financing
• Loan commitment terms generally
• Spreads that are not fixed until closing
• Reserves and/or guaranties for rollover leasing
  costs
• Buyers perceived entitlement to price
  adjustments due to liquidity crunch

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III. Strategies in Negotiating Purchase and Sale
Transactions How Do You Come Out Ahead of the
Pack?

• Non-Bid Transactions
• LOIs Detailed or General Terms
• Designation of Party whose form Purchase
  Agreement is to be used
• Selection of Title Company

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• Bid Transactions
• Mark-up Versus Summary Comments
• Pricing
• Deferred Maintenance Assumptions
• Aggressive Due Diligence and Closing Schedules
  hard on signing
• Aggressive Deposits/Release of all or portions of
  deposit
• Reputation in the market place as a closer

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IV. STATE AND LOCAL ISSUES

• Need for the use of local counsel
• Local formalities
• Transfer taxes/mortgage taxes
• Recognition of LLCs for tax purposes
• Real estate taxes
• Local governmental approvals required
• Bulk sale requirements
• Title insurance coverage
• Qualification to do business
• Liability for post closing leasing commissions

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V. TOP TEN NEGOTIATED ISSUES

• 1. DELIVERY/MAKING PROPERTY INFORMATION AVAILABLE
  TO BUYER
• Delivery to buyer of property information
• Making property information available in lieu of
  delivery
• Sellers obligation regarding property
  information limited to property information in
  Sellers (or its property managers) possession
• Buyers imputed with knowledge of all facts
  disclosed in property information

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2. SELLERS REPRESENTATIONS AND WARRANTIES

• Types of Representations and Warranties
• Sellers authority/no conflict with seller's
  organizational documents or other agreements to
  which seller is bound
• Physical condition of property
• Status of leases/existence of defaults/unpaid
  commissions or TI allowances
• Accuracy of rent roll
• Delivery of property materials/Accuracy of
  property materials
• Existence of lawsuits/condemnation actions
• Environmental condition of property
• Labor/labor union issues
• Limitations on Representations and warranties
• Representations and Warranties Limited to
  Knowledge of Key Individual(s)
• Time period for survival of representations and
  warranties
• Cap on liability for breach of representations
  and warranties
• Buyers discovery of breached representations and
  warranties pre-closing imputed knowledge from
  content of property information

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3. AS-IS

• Property sold as-is, subject to all physical
  conditions, patent or latent
• Subject to representations and warranties

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4. RELEASE PROVISIONS

• Waiver by buyer of right to bring action against
  seller relating to physical condition of
  property, arising out of the due diligence
  materials or arising out of seller's past
  operation of the property
• Possible carve outs to buyers release
• Sellers representations and warranties
• Sellers obligations under Purchase Agreement
• Sellers indemnity obligations
• Sellers fraud
• Third party claims (more difficult to get)

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5. BUYERS AND SELLERS REMEDIES

• Buyer
• Specific performance
• Damages-usually limited to out of pocket damages
  up to a cap
• Seller
• Liquidated damages - limited to deposit
• Release of Deposit to Seller

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6. SELLERS OPERATIONAL COVENANTS BUYERS
INSPECTIONS

• Leasing and lease amendments before and after due
  diligence
• Maintenance contracts and capital contracts
• Operation of property in manner consistent with
  past operations capital costs
• Invasive Inspections
• Buyers interviewing tenants
• Sellers providing notice of new matters that
  arise that, if not provided, would trigger a
  misrepresentation

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7. LIMITATION ON SELLERS LIABILITY

• Cap on maximum liability of seller under purchase
  agreement
• Limit sellers liability under purchase agreement
  to its interest in the property pre-closing and
  no right to go against sellers partners post
  closing
• Post closing holdbacks

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8. CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO
CLOSE

• Sellers representations and warranties
  continuing to be true and correct
• Sellers performance of its obligations under
  purchase agreement
• No lawsuits affecting seller or the property that
  would materially adversely affect seller's
  ability to consummate closing
• No change in property condition (tenant, zoning,
  title, physical condition)
• Tenant estoppel certificates
• Obligation vs. condition
• Threshold
• Changes to Tenant Estoppel Certificate
• Before due diligence or immediately prior to
  closing
• CCR Estoppels
• SNDAs

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9. BUYERS ASSUMPTION OF CONTRACTS AND LEASES

• Pre-closing vs. Post closing obligations
• New leases or lease amendments during escrow
• Leasing commissions for lease renewals after
  closing
• Safety provision under leasing agreement
• TI contracts and capital contracts

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10. PRO-RATIONS

• Rents (excluding delinquent rents)
• Application of post closing rents towards
  pre-closing delinquent rents
• Sellers right to pursue delinquent rents post
  closing
• Operating expenses (estimate at closing vs. defer
  until end of reconciliation period)
• Tenant security deposits/letters of credit
• Real estate taxes (cash vs. accrual basis)
• Finality of prorations
• TIs/Outstanding/Unpaid Work

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