San Jose Business Lawyers Blog

Articles Posted in Commercial, Real Estate and Construction Loans

Commercial real estate transactions can be lucrative investments, however there may also be high risk due to the amount of money that is generally at stake. The following are some examples of legal issues that sometimes arise during the sale or purchase of commercial property.

realestate transactions

 

  1. Accurate property valuation

When you are shopping for a product, it is often relatively easy to compare the price and quality to another similar product. However, pieces of real estate are often unique with no exact comparison based on size, age, use, and/or state of the building or land, making accurate valuation significantly more challenging. In addition, any current income stream or potential for future income associated with commercial property should also be a factor in determining a fair and reasonable price. Utilizing an experienced commercial appraiser can assist both buyers and sellers with determination of value.

 

  1. Due diligence

Just like any type of business transaction, commercial real estate transactions require considerable investigation. This allows a buyer to know exactly what is involved in the transaction and sheds light on any potential problems with their intended use. For example, you want to make sure that the zoning for the property allows your intended use, title of the property will identify liens, and easements, and identifying the property corners will assist in identifying possible encroachments.  Hiring an experienced attorney will assist you in avoiding costly errors.

 

  1. Assumption of liability

Prior to purchasing a piece of commercial real estate, you will want to make sure you are not assuming liability for any violations of law that may exist. For example, if you buy the property and then later find out that environmental hazards exist, you will be liable for eliminating the hazard whether or not you or the previous owner actually caused it. Such liability may be expensive and the potential for it should be examined prior to closing a sale.

 

  1. Evaluation of financial risk

Real estate can be a great investment for your business, though such purchases can also tie up a significant amount of liquid assets for a lengthy period of time. If you have difficulty filling vacancies or collecting rent from tenants, you may not be able to make your required payments to your financing company. Additionally, if you decide to sell the property due to financial struggles, it may take some time especially if the market is down. All of these long-term risks should be evaluated before you close any type of commercial real estate transaction.

 

Commercial real estate transactions can be very complicated and the above are only some examples of legal issues that must be addressed. If you are considering purchasing or selling commercial real estate, you should discuss your situation with an experienced real estate attorney at the Structure Law Group, LLP as soon as possible. Call us at  408-441-7500 for help today.

Historically, only general or limited partnerships were used for investing in real estate, but over the past decade, forming a Limited Liability Company (an “LLC”) has become a more popular choice for real estate investors. An LLC formed for real estate investment purposes is not very different from a regular limited liability company, and the steps for formation are very similar. Here are 4 benefits of using an LLC instead of a partnership or a corporation for real estate.

LLC - Purchaseing REal Estate

 

 

 

 

 

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A commercial lease is the agreement between a landlord and a business that outlines each party’s rights and responsibilities as they pertain to the rental of a property that is to be used for commercial purposes. Commercial leases are distinct from residential leases in that the party renting the property uses the property for business purposes rather than as a place to live. All too often tenants make the mistake of assuming that a standard form commercial lease will not hold any surprises; this assumption can have catastrophic consequences.

leases

Your monthly lease payment may be among the largest outlays for a business. Even if it is not, issues that arise regarding your use or access to the property that you rent may have a significant impact on your ability to effectively operate your business. For businesses that require a physical presence in order to sell their goods or services, a misunderstanding or dispute regarding your lease may effectively put you out of business, and could potentially reach your personal assets. As a result, making the investment in having an experienced business attorney review the terms of your lease can save you from making costly errors. Continue Reading

5 Items to Include in a Real Estate Purchase Contract

When you make an offer on real estate you want to buy, there can be a lot of paperwork involved. Many additions to real estate purchase contracts are obvious, such as the address of the property, purchase price and owners. Here is a list of 5 things to consider and include when drafting a real estate purchase agreement.

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1. Legal Description of Property

Be sure to include a legal description of the property, including zoning information. In commercial real estate, this is more than just the mailing address of the property. Legal descriptions must include proper nomenclature used by the U.S. Public Land Survey System, including zoning codes. If the description is not included, the real estate contract may be invalid.

2. Closing Costs

You want to establish who pays closing costs in the real estate purchase contract. The buyer and seller should specify who is responsible for common fees such as escrow fees, title fees, title insurance, transfer tax and notary fees. If you want the seller to pay all or part of the closing costs, make sure to specify this in your offer. In California, the location of the property is used to determine how fees are divided.

3. Inspection Contingency

Make sure to include an inspection contingency in your purchase contract to protect yourself if a serious issue with the property comes to light after an inspection is conducted. This includes the buyer’s right to cancel the sale after conducting due diligence.

4. Closing Date

Common time frames for closing dates are 30 days, 45 days and 60 days. You should allow sufficient time for closing contingencies, including financing the transaction.

5. Right to Modify Purchase Agreement

Allow yourself room to amend or modify the purchase contract after its completion. By adding a clause allowing the right to amend of modify, both parties may amend the purchase contract after it has been completed. Keep in mind that this does not change the original contract and large amendments are usually better done by creating a new contract.

By including these essential items in your real estate purchase contract, both the buyer and the seller are protected and the purchase is transparent for both parties. Be sure to sit with an experienced real estate lawyer before making final decisions.

About Structure Law Group

Structure Law Group is a San Jose based firm that specializes in business issues including business formations, commercial contracts and litigation.

lease.jpgWhether you’re starting a business or looking to expand, chances are you’ll encounter some kind of lease. The most common are the gross lease and the net lease. In this blog post we’ll take a look at the differences between the two and the benefits of each.

Gross Lease

In this scenario, the tenant pays a fixed amount each month. The landlord is responsible for the costs associated with property taxes, insurance and maintenance. A gross lease offers some flexibility because these properties are generally deemed as either Class B or Class C. They’re less desirable so the landlord may be willing to negotiate over things like who pays the utility bill.

Net Lease

You’ll likely see a net lease in properties deemed Class A. These are typically high value structures in a popular part of town. As such, tenants can expect to pay a fixed amount along with maintenance charges, insurance and taxes. The benefit to you as a business owner is exposure and the possibility of working in a new, less problem prone building.

Letter of Intent

Before you sign a gross lease or net lease, it’s a good idea to craft a letter of intent. This document typically addresses issues like length of the rental, when the space is available and whether or not expansion is possible. You’ll want to have a lawyer look over any lease documents. The professionals at Structure Law Group can help you craft a suitable letter of intent that protects your interests.

There is plenty more to consider when crafting a lease. At least now you understand the key differences between the two main types of commercial leases. This information will help you when you’re coming up with a budget for your business. Knowing these costs up front eases some stress and makes it easier to get started.

About Structure Law Group

Structure Law Group is a San Jose based firm that specializes in business issues including business formations, commercial contracts and litigation.

At a recent conference with San Jose and Silicon Valley real estate owners and lenders, Attorneys Jack Easterbrook and Tamara Pow presented their “Top 10 List” of issues that commonly arise in commercial real estate loan transactions. Having been involved in countless real estate and commercial loan transactions, Tamara and Jack developed the list to share with the participants key points to be attentive to when entering into a real estate transaction. The Top 10 List assumed that the basic business terms of the transaction had been decided, so the focus was on items that can arise in the documentation phase and create issues or obstacles in getting a deal to closing.

A previous blog presented three items from this Top 10 List, including: (1) inconsistency between a borrower’s state of registration and a lender’s requirement; (2) the special purpose entity and the independent direct/manager requirements of the lender; and (3) the personal guaranty. Here are three more items to keep in mind when negotiating a commercial real estate loan:

No. 4: Treatment of Other Creditors, Including Any Mezzanine Lender.

Comment: Are other creditors or lienholders involved, and will intercreditor or subordination agreements be necessary? If the answer is “yes,” these agreements will need careful scrutiny. The recent trend in the case law continues on the path of strictly construing the terms of such agreements. This includes Bank of America v. PSW NYC LLC, in which it was held that an agreement between a senior secured lender and a mezzanine lender prevented a foreclosure by the mezz lender until it cured payment defaults in the senior secured lender’s loan. The bottom line: other creditors of the owner/purchaser, whether new or existing when the deal is done, can significantly affect getting a transaction to closing. It is very worthwhile to have a strategy concerning them worked out early.

No. 5: Prohibition on Transfers, Including Transfers of Fractional Interests in a Borrowing Entity.

Comment: Standard loan documents often contain language that says that the borrower is in default if the property securing the loan, or any interest in the property, is transferred. However, an owner or borrower should not think it is safe from this provision if the title to the property is held in an entity, such as an LLC, just because the title is not changing. Many loan documents also provide that if an interest – perhaps even a small interest – in the ownership entity changes, a default is triggered. An owner or borrower is wise to not ignore these provisions. Borrowers should carefully consider whether they will need to (or want to) transfer partial ownership interests in the future and lenders should consider the magnitude of such changes that may be acceptable. A transfer of an ownership interest could occur as a result of estate planning needs, in connection with a management transfer, or perhaps the unforeseen death of someone in an ownership group, such as an LLC member. If the parties don’t address these provisions before loan documents are finalized, subsequent events may trigger an unexpected and immediate default with unknown future implications.

No. 6: Prohibition on Changes in Management of the Borrower.

Comment: Are the borrower’s short-and medium-term management plans prohibited by the loan agreement? Make sure the loan documents accommodate planned future changes in managers of the owner. For example, a family owned LLC may be intending to pass management to the next generation or a key employee long before the maturity date of the loan. Like prohibited transfers of ownership interests, loan documents may prohibit transfers of management power. Pay attention to these provisions and make sure intended changes are not prohibited by the loan documents. It may also be prudent to have potential future managers pre-approved by the lender.

Watch for our next blog for the remaining items addressed in the presentation.

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to the author.

 

Attorneys Tamara Pow and Jack Easterbrook recently participated in a panel discussion of San Jose and Silicon Valley commercial real estate owners, lenders, borrowers and other professionals about issues arising in recent commercial real estate transactions. Jack and Tamara, at the conference, presented a “Top 10 List” of things to be alert to in real estate loan documents. It was assumed that the basic business terms of the purchase and sale agreement and loan transaction had been negotiated and agreed upon. The question posed was, “So what pitfalls can occur after that, and what issues do you want to be alert to as the deal gets documented – particularly in connection with the debt financing?” The point being emphasized was that a transaction can move to a closing with a minimum of angst if the parties identify early on those issues that will be important deal points, but may not be covered in detail in the financing terms outlined in a term sheet or commitment letter.

This blog addresses three of the “Top 10″ points raised in the presentation. Subsequent blogs will address remaining items discussed at the conference. No one point is necessarily more important than the others, as the relative importance of a particular item will vary transaction to transaction. However, the attorneys at Structure Law Group see these factors repeatedly arising in real estate loan transactions.

No. 1: Inconsistency Between Borrower’s State of Registration and Lender’s Requirement.

Comment: An institutional lender sometimes has very specific requirements. If the owners are establishing a new entity to serve as the borrowing entity, they may want to wait to register the company until after a lender is chosen and any jurisdictional issues are clarified. In some unfortunate situations, we have seen borrowers go ahead with the formation of their entity in California, only to later be asked to provide the lender with a nonconsolidation opinion that may only be viable under the law of another state such as Delaware. So, in addition to asking the lender for any requirements it may have with regards to the type of entity being formed, the jurisdiction, or the bankruptcy remote requirements, make sure to ask what opinions, if any, they will be requesting from counsel. Often these opinions can be negotiated in advance so that you are sure you are forming in a state that is consistent with those requirements.

No. 2: The Special Purpose Entity and Independent Director/Manager Requirements of the Lender.

Comment: In addition to possible Lender requirements regarding which state to form your legal entity in, your lender may have specific requirements that the entity you form to take title to the property is a special purpose entity, meaning that it is formed for the purpose of holding this property only, and will not hold other properties or do other lines of business. This way the lender can feel secure that its collateral will not be negatively affected by any other properties or going concerns in the entity. In addition, the Lender may require that the entity appoint independent directors or managers who will act on its behalf when a vote is required for the entity to declare bankruptcy, or other dangers to its collateral. Sophisticated lenders will have clear language requirements that must be added to the entity’s formation documents. In some instances, we have seen lenders require certain language be added to the Articles of Organization of an LLC, but usually it is required to be in the operating agreement of the LLC. However, again, make sure you and your advisors check with your potential lenders in advance of forming your entity, otherwise you may have the additional expense of amending and restating your organizational documents.

No. 3: The Personal Guaranty: Details of Its Scope.

Comment: Several different kinds of guarantees are in use beyond the full guaranty often preferred by lenders. Examples of these are the partial guaranty exempting assets or obligations, the “Bad Boy” guaranty, and the springing guaranty. A recent court case, known as Series AGI West Lynn, held that carve outs or limitations in guaranties will be very strictly construed. A carve out prohibiting the lender from taking any action against the guarantor’s house, the court found, did not include proceeds from the sale of the house even though the funds were placed in segregated accounts. In a victory for the lender, the court noted that although the house was excluded under the guaranty, it did not expressly provide that proceeds from a sale of the house were excluded. The court noted that it was not its job to protect the parties from the ugly implications of the plain language in their negotiated agreements.

The remaining items addressed at the conference will be the subject of a later blog, coming in early 2014!

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to the author.

The personal guarantee has long been used to bolster the quality of a commercial loan, real estate loan or business loan. Often the personal guarantee is a full guarantee, extending to all obligations of the borrower and giving a lender potential recourse to all property of the guarantor in an enforcement action. Sometimes, however, the lender and guarantor agree that the guaranty will be more limited. A recent case out of the Bay Area, Series AGI West Linn of Appian Group Investors DE LLC v. Eves, 217 Cal. App.4th 156 (2013), dealt with such a limited guarantee , which carved-out the guarantor’s home and exempted it from the lender’s reach under the guarantee. The personal guarantee was very broad, but for the specific exclusion for the house. After the guarantee was signed, but before the loan soured and the lender demanded payment, the guarantor sold the exempted house for cash and put the proceeds of the sale in segregated accounts. Once defaults occurred under the loan, the question at issue was whether the carve-out under the guarantee exempted only the asset named, a house in Como, Italy (but for our purposes it could have been a home in San Jose or Palo Alto as well!) or extended to the proceeds from the cash sale of the house.

In the AGI West Linn case, the lender sued the guarantor and also asked the court to enter a right to attach order and writ of attachment to lock up the cash from the sale of the house. The guarantor opposed this, arguing that the money was simply proceeds of the excluded residence and, as the house itself was excluded from lender’s recourse, the direct proceeds of the sale of the house should be excluded as well. The lender countered that the guarantee did not say anything about “proceeds” being excluded, only the house.

The court held for the lender, taking a strict reading of the guarantee.

So what is the take-away? Careful drafting is a must if parties wish to exclude certain specific assets from the otherwise broad scope of a personal guarantee. The court here read the plain language of the guarantee and stated that if the guarantor intended to include proceeds of the sale of the asset as part of the exclusion, he should have expressly put this in the guarantee , and it was not the court’s job to save a party from the ugly implications of the plain language of a contract. One gleans from the court opinion that the strategy of strictly construing the guarantee would also likely apply if other limitations, such as a limitation on the scope of the guaranteed obligations, existed and required analysis.

Another point is to be aware that when analyzing the guarantee, this court rejected the approach of applying the UCC formula for treatment of proceeds of collateral, which extends a lien on an asset to a lien on proceeds of the asset if it is liquidated (subject to certain tests). If the UCC’s formula was being followed, segregated proceeds of the sale of the exempted house would have naturally been included with the carve-out of the house. The court in the AGI West Linn case dismissed this avenue of analysis and instead applied principles of strict contract interpretation.

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to the author.

In this digital age, the courts increasingly have zero tolerance for errors on a UCC-1 financing statement intended to perfect a lender’s security interest in collateral as part of a loan transaction. Most recently, a federal court in Rushton v. Standard Industries, Inc., et al. (In re C.W. Mining Company), 488 B.R. 715 (D. Utah, 2013) ruled that a UCC financing statement that omitted two periods from the debtor’s name was materially misleading, and the “secured party” was therefore not perfected. A lender who thought it was properly secured on a $3 million obligation suddenly found itself entirely unsecured because of this seemingly trivial mistake!

The debtor in this matter was C.W. Mining Company, whose fortunes had slipped, leading to a bankruptcy. Well before the bankruptcy petition was filed a creditor with a security interest in coal owned by the debtor (C.W. Mining Company was a coal producer) filed a UCC-1 financing statement naming the debtor as “CW Mining Company.” The bankruptcy trustee (usually the bad guy in these situations, from the secured creditor’s point of view) brought an action to, among other things, avoid the lien because of this mistake, arguing that the creditor was not properly perfected.

The Bankruptcy Court and the Federal District Court, on appeal, agreed with the trustee. They held that the manner in which the creditor set forth the debtor’s name on the UCC-1 financing statement was seriously misleading, as it omitted the two periods. Of major importance was the fact that the search algorithm used by the state – Utah in this instance – did not pick up the filing in its data base when the debtor’s proper name was entered.

This recent case is in line with the harsh holdings for creditors by other courts on this issue. So what is the take-away lesson? If you intend to be a secured creditor, treat the debtor’s name as you would a new email address or a phone number. If you are off by one character or digit, the communication fails. This means getting the debtor’s registered name (when the debtor is a corporation, limited liability company or LLC, or limited partnership) correct from the beginning by searching the Secretary of State’s business entity information and/or obtaining copies of articles. Don’t rely on the name put down on a letterhead, logo or business card, which may simply be a trade name. Also, when filling out a UCC-1 financing statement, be sure the information inserted on the form is carefully checked and the process supervised, not delegated to an inexperienced person and forgotten.

There is a UCC Safety Net but it has Many Holes!

If you discover that a financing statement has a mistake in the debtor’s name, you of course should take steps to correct it, but even without doing so a possibility exists that the security interest will nevertheless be perfected and enforceable. The Uniform Commercial Code provides that if a search of the records in a state’s filing office under the correct debtor name using “the filing office’s standard search logic” would disclose the creditor’s financing statement, the error in the debtor’s name is not seriously misleading. (This is found in Section 9506 of the California Commercial Code.) The more sophisticated the particular state’s UCC search algorithm, the more likely it is that errors or inconsistencies will be recognized and the financing statement nevertheless captured and displayed in a search, providing a small measure of safety for the secured creditor. The obvious problem is that it is difficult or impossible to know in advance whether a seemingly minor mistake on the financing statement will be fatal or not. Therefore, the only safe approach is to get the debtor’s registered name right on the UCC-1 financing statement, character-by-character.

A Legal Note Concerning UCC Financing Statements and Perfecting a Security Interest in Collateral

To have an enforceable security interest in most types of business assets, a UCC-1 financing statement must be filed in the filing office of the state where a debtor is registered – assuming the debtor is a business entity such as a corporation, limited liability company or limited partnership. In California and most other states, the filing office is run by the Secretary of State. Most lenders and borrowers are very familiar with this process. The UCC-1, once filed, becomes part of the searchable data base in the state where it is filed. In lawyer-speak, filing the UCC-1 financing statement “perfects” the security interest, which is an essential requirement to making it generally enforceable. The UCC-1 filing also gives the lien priority over any lien described in a later filed UCC-1 financing statement, as well as certain other types of filings. If a person wants to learn whether anyone has a lien encumbering assets of a particular debtor, a search can be conducted under the debtor’s name and all generally enforceable encumbrances on the business assets of the debtor will show up – so long as the correct debtor name is entered.

A UCC-1 filing will not perfect a security interest in certain types of collateral. To perfect a security interest in real estate in California and most other states (as is well known by most lenders and borrowers), a deed of trust or mortgage must be recorded in the real property records of the county in which the real property is located. Other types of specialized collateral, such as copyrights, aircraft and motor vehicles, have unique filing offices and requirements for perfection of security interests. A security interest in some other types of collateral, such as bank accounts, stocks and securities, may be perfected by possession or control.

You probably can guess the last point to be made here. Perfection of security interests can be a confusing matter, so if you have any questions, consult your attorney!

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to the author.

Head’s up!! UCC financing statements are changing as of July 1, 2013. Lenders and borrowers need to take extra care to ensure that they have correctly prepared UCC financing statements and, of course, consult with an attorney as necessary. UCC filings are of critical importance in any secured loan transaction, whether it involves asset based loans, technology lending, construction financing, equipment financing, and even real estate lending where fixture filings may be an integral part of the transaction or personal property may be included in the collateral pool. Accordingly, changes in UCC forms affect every lender, secured party and borrower. In a problem loan, loan workout or bankruptcy situation, the validity of the lender’s security interest becomes of paramount importance.

For lenders, the basic rule for perfecting a lien or security interest in most types of assets is to file a UCC-1 Financing Statement with the Secretary of State where the debtor or borrower is registered. If the borrowing company happens to be in San Jose or Palo Alto, California, for example, and is registered as a California corporation, the UCC-1 is filed with the Secretary of State in California. As of July 1, a revised form of UCC-1 is to be used in most states, including California and Delaware.

The changes to the form are driven by privacy concerns and primarily involve eliminating entries for a company’s registration number and an individual’s social security number. Such identifying information has not been required – in fact, social security numbers have automatically been redacted or made unreadable – for a while now in California. One thing the change highlights, however, is the ever-increasing importance of getting the debtor’s name correct on the UCC form, character by character, as other references to a borrower or debtor no longer appear.

California says that it will continue to accept the “old” form of UCC-1 for the present, but that may change with the old forms entirely eliminated in the future once new forms are widely circulated. Other states have announced that the period for accepting old forms will be phased out just 30 days after July 1, after which time only new forms will be accepted for all UCC filings.

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to the author.