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DOING BUSINESS IN CALIFORNIAReal Estate Transactions

Part 2 – Basic Elements of Real Estate Sale and Purchase

Presented by:Noriyuki ShimodaAdmitted in Japan and CaliforniaSquire Sanders (US) LLPPhone: 415-393-9894Email: [email protected]

February 15, and March 21, 2012Palo Alto Office

Presentation for Japanese Business Persons:

2

Introduction

•Three major areas of real estate transactions

Office Lease – Seminar Part 1

Sale and Purchase – Seminar Part 2

Deed of Trust/Mortgage Financings – Seminar

Part 3

3

Basic Vocabulary

• A Fee, A Fee Simple• Real Property (Land, Building, and Fixtures)• Personal Property (Tangible or Intangible)• Improvements• Escrow, Escrow Agent• Escrow Instructions• Preliminary Title Report• Title Policy, Title Insurance Policy• Survey, Surveyor• ALTA (American Land Title Association) Form• CLTA (California Land Title Association) Form

4

Basic Vocabulary (cont)

• Phase 1• Easement• Grant Deed• Quitclaim Deed• Deed of Trust• Recording, Recording Office• Bill of Sale• Estoppel Certificate• FIRPTA• Form 593C• 1031 Exchange

5

Typical Process

• Identification of Property

• Preliminary Due Diligence

• Negotiation and Execution of Letter of Intent

• Negotiation and Execution of Definitive

Purchase and Sale Agreement

• Opening of Escrow

• Payment of Deposit

• Due Diligence

• Closing

6

Negotiation and Execution of Letter of Intent

• Seller and Buyer negotiate for and agree onbasic terms and conditions of the sale andpurchase agreement in Letter of Intent whichis usually non-binding.

• Typical Provisions of Letter of Intent

Identification of Property

Purchase Price

Deposit Amount

Period of Due Diligence

Escrow

Broker

Closing

7

Negotiation and Execution ofPurchase and Sale Agreement

• Seller and Buyer negotiate for and agree on

the definitive and binding sale and purchase

agreement.

• Major Provisions of Purchase Agreement

Purchase Price

Escrow Deposit

Escrow

Conditions to the Closing

Method and Period of Due Diligence

Deliveries at Closing

8

Negotiation and Execution ofPurchase and Sale Agreement

• Major Provisions of Purchase Agreement

(cont.)

Costs and Expenses

Prorations

Representations and Warranties

Damage and Destruction

Brokers

Assignment

Miscellaneous

Exhibits

9

Opening of Escrow and Payment of Deposit

• Opening of Escrow

• Escrow Agent

Title company often acts as escrow agent

Role of escrow agent

• Payment of Deposit

10

Due Diligence

• Property Condition

• Title Matters (Preparation and review of

preliminary title report, recorded documents

and ALTA survey)

• Environmental Conditions

Phase I Investigation and Report

Possible Phase II Investigation and Report

• Financing

11

Closing

• Seller’s Action

• Buyer’s Action

• Escrow Agent’s Action

12

Closing – Seller’s Action

• Delivery of Documents to Escrow Holder Grant Deed (signed and notarized) Bill of Sale General Assignment Lease Assignment Estoppel Certificates FIRPTA Certificate Withholding Certificate Form 593-C Proof of Authority

– Board Resolution– Certificate of Good Standing

Approved Closing Statement

13

Closing – Buyer’s Action

• Delivery of Money and Documents to Escrow

Holder

Funds (Purchase Price and Costs)

Counterpart of General Assignment

Counterpart of Lease Assignment

Proof of Authority

Approved Closing Statement

14

Closing – Escrow Agent’s Action

• Required Actions

Recording of Grant Deed (and any other documents

that are to be recorded)

Disbursement of Funds

Issuance of Title Insurance Policy to Buyer

Disbursement of Documents to Buyer

Disbursement of Documents to Seller

(FIRPTA Holdback)

15

Typical Documents

• Letter of Intent

• Purchase and Sale Agreement and Joint

Escrow Agreement

• Grant Deed

• Bill of Sale

• General Assignment

• FIRPTA Certificate

• Form 593-C

16

• Seller’s Due Diligence Document Deliveries

Agreement may not specifically require

document deliveries

Try to limit the Seller’s delivery obligation to

a list of specific documents that have been

or will be delivered by the Seller

If the Buyer insists upon obligation to

deliver all documents of a particular type

(e.g., all surveys, environmental reports,

geotechnical reports, etc.), limit the

obligation to documents that are “within the

Seller’s possession or reasonable control”

Important Provisions of Purchase and Sale Agreement andJoint Escrow Agreement from Seller’s Perspective

17

• Scope of Due Diligence Investigation

Require the Buyer to give the Seller written

notice prior to entry and allow the Seller to

be present

Prohibit test borings and other invasive

investigations without the Seller’s consent

Require the Buyer to repair any damage

caused by its investigations


18

• Indemnity/Insurance

Require the Buyer to maintain commercial

liability insurance and name the Seller as

additional insured

Include a provision for the Buyer to

indemnify the Seller against losses, claims

and costs arising from the performance of

the Buyer’s investigations


19

• Buyer’s Termination Right

“Free look” is customary

It is customary to allow the Buyer to

terminate for any reason at its sole

discretion

Upon termination, the Buyer should receive

its deposit, less one-half of all title and

escrow charges


20

• Due Diligence Reports

Include a provision requiring the Buyer to

deliver to the Seller copies of its appraisals,

studies and other due diligence reports if

requested by the Seller

Provide that the Buyer’s deposit will not be

returned until the Buyer delivers copies of

documents to the Seller with officer’s

certification


21

• Seller’s Representations and Warranties/As-Is.

Scope of Representations and Warranties

– To the extent possible, limit representations andwarranties to “Seller’s knowledge.” Includenarrow definition of “Seller’s knowledge”

– Carve out the information disclosed to, ordiscovered by, the Buyer

– Do not give real property title representation

– Do not give representation as to physicalcondition of the property.

– OK to give narrow hazardous materials andcompliance with laws representations


22

• Seller’s Representations and Warranties/As-Is (Cont’d)

Pre-closing Breach of Representations/Warranties.

– Include “Seller favorable” mechanism forrepresentations and warranties that are found tobe incorrect prior to closing

Survival of Representations/Warranties

– Try to avoid survival

– Customary survival period is 1 year

– If survive, attempt to establish a liability cap

As-Is Clause

– Include broad “As-Is” provision

– Include Civil Code Section 1542 release


23

• Pre-Closing Remedies

Seller’s remedy

– The customary pre-closing remedy for theBuyer’s default is termination of the agreementand recovery of liquidated damages

Buyer’s remedy

– Attempt to limit the Buyer’s pre-closing remedyfor the Seller’s default to termination of theagreement, a return of its deposit andreimbursement of its reasonable out-of-pocketexpenses up to a cap

– Expressly exclude all other remedies, includingspecific performance


24

• Tenant estoppel certificates

Attempt to limit the Seller’s obligation to

“commercially reasonable efforts” to obtain

tenant estoppel certificates

If the Buyer insists upon a specified

percentage to be obtained, try for a low

percentage (e.g., 70% of rentable area) and

allow the Seller to substitute a “Seller’s

Certificate” for a tenant estoppel certificate

that cannot be obtained


25

• Assignment

The Buyer should only be permitted to

assign to its affiliates

Require advanced notice of assignment

(e.g., 10 business days prior to closing

date) in order to allow the Seller time to

revise, execute and deliver closing

documents


26

• Confidentiality Agreement

Require the Buyer to keep information

concerning the Property confidential until

the closing

Incorporate by reference any confidentiality

agreement that may have been executed

prior to the Purchase Agreement


27

Preliminary Title Report

• Buyers protect themselves against defects in

title through title insurance.

• A title company issues an insurance policy that

insures Buyer against damages or expenses

arising from a defect to title that exists as of

the date of the insurance policy.

• The title company investigates public records

to determine the state of the title to the

Property, and exempts from coverage any

defects that it finds.

• These defects are listed in the Preliminary Title

Report.

28

Curing Title Defects

• The Buyer examines the exceptions in the

PTR, and if they are acceptable, agrees to

close the transaction with those exceptions.

• If new exceptions arise and the Seller does not

cure them, the Buyer has the right to terminate

the agreement.

29

Title Insurance

•At closing, the title company issues a title

insurance policy to the Buyer.

30

Grant Deed

•A legal document that transfers title to real

property.

•Once the grant deed is signed by the Seller and

delivered to the Buyer, the Buyer is owner of the

Property described in the grant deed.

•An unrecorded grant deed is effective only as to

the parties to the grant deed and third parties

who have notice of it.

•A recorded grant deed imparts constructive

notice and is effective against everyone.

31

Bill of Sale

•A legal document that conveys title to personal

property on the real property.

32

General Assignment

•A legal document that assigns to the Buyer all

assets of the seller related to the real property

that are not real property or personal property:

Agreements

Warranties, permits, trade names, trademarks

33

Lease Assignment

•A legal document that assigns to the Buyer all of

seller’s rights in leases of tenants of the real

property.

34

FIRPTA

• The Foreign Investment in Real Property Tax Act of

1980 (FIRPTA) applies to a foreign person’s sale or

other disposition of real property located in the United

States.

• A “foreign person” includes a nonresident alien

individual and a foreign corporation. A U.S. subsidiary

of a foreign corporation is not a “foreign person.”

• A foreign person’s gain or loss from the sale of U.S. real

property is treated as income effectively connected with

a U.S. trade or business subject to U.S. federal income

tax on a net basis at graduated tax rates.

• As a means of collecting U.S. federal income tax owed

by a foreign seller of U.S. real property, the Buyer is

required to withhold 10% of the purchase price and to

remit such withheld amount to the IRS.

35

FIRPTA

• A foreign Seller can seek to reduce the 10% withholding

tax to an amount equal to the foreign Seller’s actual U.S.

federal income on the gain from the sale of U.S. real

property by filing an application for and obtaining a

reduced withholding certificate from the IRS.

• A foreign Seller of U.S. real property must file a U.S.

federal income tax return to report the gain or loss from

the transaction.

• A U.S. Seller can avoid the 10% withholding tax by

furnishing the buyer with a FIRPTA certificate that

certifies the non-foreign status of the Seller.

36

Form 593-CCA REAL ESTATE WITHHOLDING

•Under CA law, the gain or loss from the sale of real

property located in CA is subject to CA income tax.

•As a means of collecting CA income tax owed by the Seller

of CA real property, the Buyer is required to withhold 3-

1/3% of the purchase price and to remit such withheld

amount to the CA FTB, unless the Seller can establish that

an exemption from the withholding tax is available.

37

Form 593-CCA REAL ESTATE WITHHOLDING

•An exemption is available for, among other things, (i) a

Seller that is a CA corporation, (ii) a Seller that is a foreign

corporation qualified to transact business in CA, (iii) a

Seller that is a corporation maintaining a permanent office

in CA staffed by permanent employees after the sale, and

(iv) a Seller that incurs a loss or zero gain from the sale.

•A Seller claiming an exemption must furnish the Buyer with

a Form 593-C certifying that the Seller qualifies for an

available exemption.

•A Seller of CA real property must generally file a CA

income tax return to report the gain or loss from the

transaction.

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