ret outline

8/3/2019 RET Outline

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Class structure:

Brokers

Purchase and Sale Agreements

Closings

Development (construction agreements)

Leasing

Brokers: Brokerage Process

o Listing meeting: when person who wants to sell or lease theirproperty hires a broker

o Listing agreement: when there is an agreement between

person and broker and person lists their property with the brokero Marketing / MLS (multiple-listing service); MLS is a

computerized site that has all the listings and says compensation

to agent who brings a buyer to the brokero Sale closing / commission paid

Why do people list their property with a brokero Broker has experience

o Broker has access to MLS

o Brokers know future development plans of an area

o Advertising is a lot cheaper through brokers because they get

dealso Negotiation expertise

o Setting a property price is an art

If you dont sell w/in 30 days, you have a stale listing

Broker for seller: aka listing broker, (they have agreement with sellerto list the property) sellers broker

Broker for buyer: aka selling broker, (brings buyer to the table sothat broker has actually sold the property) co-operating broker, buyersbroker

Duties of a Brokero In CA, broker owes a fiduciary dutyto client (even if against

their own best interest)

Brokers are paid by commission and so they tend to careabout themselves first

o Dual-agency Broker: broker who represents both seller andbuyer (which presents a huge conflict of interest)

CA allows this as long as it is agreed to in writing

Broker doesnt mean same person but same agency(Sothebys, for example)

Broker > broker associate > agent

Agent:o Similar to broker but they work under the broker


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Who pays the broker?o Typically the seller pays the broker(s)

o Listing broker will place property on MLS; this implies an

agreement to share commission with buyers broker

Three types of listing agreements:

o 1. Exclusive Right to Sell preferred by listing brokers because they get the

commission no matter who finds the buyer

one alternative here is to have seller give a list of people tobroker that if one of them buys the property the sellerdoesnt have to pay the broker; this is like exclusiveagency agreement but there is a limit on the list

o 2. Exclusive Agency Agreement

the listing broker is the only authorized agent for the sellerin connection with the property

broker gets commission if anyone finds the buyers exceptfor the seller (if seller finds buyer then broker doesnt getany commission)

o 3. Open Listing

unique because: can be revoked at any time by seller;does not require a definite termination date; can be signedwith many brokers

broker only gets commission if they find the buyer

CAR requirements: (?)o description of property

o list price

o description of personal propertyo has to be authorized by MLS

Commission to Brokero Under CAR (exclusive authorization/right to sell):

o 1. CAR form provides that commission is earned when buyer

makes an offer on the listing terms

however, if sale doesnt close and there is merely an offer,the broker only gets commission if buyer is ready,willing, and able

if there are conditions on offer, buyer is not willing (yet at

least) ready, willing, and able typically only exists at closing in

practice

this form is biased towards brokerso 2. commission can be earned if property is transferred X days

after listing agreement expires to a person who is on a list givenby the broker to the seller within X days of the expiration of theagreement


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o 3. If seller withdraws property from sale during term of exclusive

right to sell they must pay the broker commission

Duties:o Broker has duty to exercise reasonable effort and due diligence

to sell

o Broker must tell seller about all offers (even if unrx)o Seller has a duty to consider all offers brought to them

o Seller indemnifies (holds harmless) broker for material facts

omitted to broker or false information representedo Broker promises to hold a deposit for the seller (earnest money

or good faith deposit)o Seller authorizes a lock box

o Seller authorizes placement of a sign on the property (without

permission it is a trespass)

A careful broker will never place the sign on the propertybecause of liability issues; they will hire another companyto put the sign in and insure it

Buyer/broker agreement: legal but barely used because if youchange the area you want to live, the broker may not have expertknowledge of the new area

Pocket listing: listing that is not readily accessible to other brokers ormembers of the public; listing that is not on the MLS

o This is where larger brokerage firms have an advantage because

they usually know what is not listed on the MLS

Purchase and Sale Agreements:

Timeline:o 1. LOI (letter of intent)

may precede offer but not necessarily

makes more sense for commercial because high lawyercosts in drafting the offer

the problem with the LOI is youve already agreed to thebig parts of the deal but the little parts may not be agreedupon; this opens the door to litigation

if properly used, can be a good mechanism to save moneyin determining that you cant even agree to the big parts ofthe deal

o 2. Offer

AIR Standard Offer, Agreement and Escrow Instructions forPurchase of Real Estate (called by brokers Purchase and SaleAgreement

o 3. Counter offer

there can be multiple counter-offerso 4. Agreement


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o 5. Opening of Escrow / Deposit Paid

escrow: a third party that is licensed in CA by dept of realestate that serves as the neutral repository for documentsand funds

o 6. Due Diligence period begins

contingency period begins buyers duty to purchase the property does not comeinto effect until contingencies in favor of buyer havebeen approved by buyer or waived by buyer

i.e. seller can start investigating the propertyo 7. Due Diligence period ends

ends when the last contingency expireso 8. Closing

money exchanges hands and deed is recorded

Deposit:o

indicates good faitho if you dont have an excuse to get out of the deal then you lose

the deposit (at least)o Liquidated damages clause in AIR Purchase Agreement:

deposit pays liquidated damages in an unexcused breacho Usually 3-5%; must be a good faith estimate; comports with

requirements of the particular stateo initial deposit and additional deposit

may or may not have additional deposit

addtl is usually for commercial properties that take a longtime to close because of approvals from others (govt, etc.)

addtl: also used when seller is going to give up a rightsomewhere down the line

put provision if I need more time for due diligence, I canobtain a X day extension but this will cost

initial + addtl = the deposit and the deposit is used forliquidated damages

o invest deposit (if it is large and closing time is lengthy usually

commercial). The earnings on the investment goes to whoever getsthe deposit

Due Diligence:o

whenever see due diligence question ALWAYS start with whereare we on the timelineo 1. Free look: what a buyer wants; means that buyer/seller

enter into agreement and buyer has X days to conduct duediligence; there are no restrictions on due diligence buyer can do(but must be accompanied if on property); buyer says if theyapprove due diligence or not; liberal and easy for buyer; for seller,they are locked in; buyer can walk for any reason and get money


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back but seller must sell if buyer wants to buy; unequal balance ofpowero 2. AIR lists DD items that can be investigated: doesnt givebuyer right to walk away pure and simple; AIR requires that buyer ofproperty has to give notice of its disapproval of the particular item it

is disapproving to the seller and seller has 10 days to decide if theyare willing to cure that item; seller has right to cure (must becured by the end of escrow); silence = approval in AIRo 3. Method of Notice: distinguishes between active andpassive; if you dont give notice of a particular item of due diligencethen it is assumed disapproved.

ASK: is method of notice part of AIR

Standard Offer, Agreement and Escrow Instructions forPurchase of Real Estate

1. Buyero Begins by defining buyer

Seller wants to define buyer narrowly Buyer wants to define buyer very broadly (basically me or

anyone else I choose)

this is because of the next sentence: buyer has rightto assign Buyers rights hereunder, but any suchassignment shall not relieve Buyer of Buyersobligations herein unless Seller expressly releasesBuyer

o Seller is defined as owner thereof

This means that buyer doesnt know who the seller is

This increases the validity of the document because dealwont fail because of a silly error that could result of buyerput the name of the seller on the K and the name is wrong

2. Propertyo 2.1 Ways to identify property:

1. commonly known street address: insufficient to definethe property

2. APN: special number associated with each property

3. US Public Lands System

Land divided into ranges, sections, and townships

4. Metes and Bounds: land into a grid

5. Land divided into lot, block and track

This is based on the division by Metes and Bounds

Only 3, 4, and 5 are legal with 4 being the best (5 is basedon 4)

Legal descriptions are great, but they are put together bysurveyors and arent that helpful for us.

o 2.2: if the legal description of the Property is not complete or


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inaccurate, this Agreement shall not be invalid and the legaldescription shall be completed or corrected to meet therequirements of Title Company

this means that if Buyer messes up the legal description,the deal can still go forward because the Title Company

can fill in the correct information 3. Purchase Price =

o Deposit: initial deposit + additional deposits

o Rest of Down payment

Both of these are equity/cash buyer puts in; the rest isfinancing

o New Loan

o Existing Loan

May be for a shorter maturity period; may have a betterinterest rate

o Seller financing / Carryback financing

Ex: $100k down payment and $750 new loan but $150 stillat large. Seller really wants to sell the property so theydecide to loan the buyer $150k.

o Net income = Value x Capitalization

Ex: 100k (net income) = $1mil (purchase price) x 10%(cap)

o Value = NI/Cap

9. Contingencies to Closingo Due Diligence

First question for due diligence question: where are we on

the timeline? Important because it has to do with legal rights of the

buyer and seller

Also important because it encourages buyer to investigatethe property/land etc.

a. disclosure

written notice of any material defects in the propertythat they know of

o material defect doesnt have a definition; what

is material to one person may not be materialto another

ex of a material defect: not tellingsomeone that guy plays metallica songson his guitar during the day

as is does not get you out of providing notice

if in doubt, disclose

b. physical inspection: Buyer has 10 or X days from thereceipt of the Property Information Sheet or the Date of


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Agreement whichever is later, to satisfy itself with regardto the physical aspects and size of the Property

whatever you buy, make sure its been built withpermits according to code

bonus room: if you dont say bedroom you dont

have to be regulated by code requirements forbedroom

Under AIR, seller can cure any disapproval of duediligence EXCEPT environmental and financing

If seller cant cure something, incentive to completedeal with current potential buyer because youll haveto disclose whatever was learned to otherbuyers.usually results in renegotiating price

c. hazardous substance conditions report: Buyer has30 or X days from the receipt of the Property InformationSheet or the Date of Agreement, whichever is later, to

satisfy itself with regard to the environmental aspects ofthe Property. Seller recommends that Buyer obtain aHazardous Substance Conditions Report. Report shall bepaid for by Buyer.

Hazardous substance: any substance whosenature and/or quantity of existence, use,manufacture, disposal or effect, render it subject toFederal, state or local regulation, investigation,remediation or removal as potentially injurious topublic health or welfare.

Hazardous substance condition: the existenceon, under, or adjacent of a hazardous substance thatwould require remediation and/or removal underapplicable laws.

Reasons:o 1. Safety

o 2. Liability (CERCLA)

o 3. Feasibility

CERCLA or Superfund: Congress passed in1980. Comprehensive Environmental Response,Compensation, and Liability Act.

o Owner or operatoris strictly liable forcleanup of contaminated property

o Irrelevant if contamination occurred by

previous owner/operator or some stranger.Current owners/operators were strictly liable

o Level of cleanups required went beyond

technologies available at the time.o Standard: child can eat X spoonfuls of dirt and


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not get cancer

Exception and exemption to strict liability:o Exemption:definition of owner or operator

does not include parties who after allappropriate inquiryhave not found any

recognized environmental condition on theproperty

this means if you have done duediligence correctly and you have notfound a recognized environmentalcondition, then if the property is in factfound to be contaminated, thegovernment can not sue you.

Deals can still move forward because wearent terrified of purchasing property aslong as you do what you are supposed to

doo Exception:

Act of God caused contamination

Act of War caused contamination

Phase I Environmental Site Assessment (ESA)o Non-intrusive

Phase II ESAo Targets environmental condition uncovered in

Phase Io Intrusive need permission from seller

Remediationo Make the property clean

o However, remediation doesnt always work,

can take a long time, has to be approved andoverseen by the government and is extremelyexpensive

NFA: No Further Action lettero Only if remediation was undertaken and

completed under govts approved plan, thenwhatever agency was responsible foroverseeing the remediation will issue a NFA

letter. Between parties:

o Indemnities:

Buyer could require indemnity fromseller; seller will pay costs up to X dollars

o Environmental Holdbacks:

Money at closing doesnt go from buyer


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to escrow company to the seller as ittypically does. A certain amount of themoney goes from the escrow company toa fund which is left for remediation.

d. soil inspection

buyer has 30 or X days from the receipt of theProperty Information Sheet or the Date ofAgreement, whichever is later, to satisfy itself withregard to the condition of the soils on the Property.Seller recommends that Buyer obtain a soil testreport. This report will be paid for by Buyer. Sellerwill provide Buyer copies of any soils report thatSeller may have within 10 days of the Date ofAgreement.

e. governmental approvals

f. conditions of title

g. survey h. existing leases and tenancy statements

i. other agreements

j. financing

k. existing notes

l. personal property

m. destruction, damage or loss

n. material change

o. seller performance

p. warranties

q. brokerage feeo 9.3 if any buyers contingency or any other matter subject to

buyers approval is disapproved as provided for herein in atimely manner, Seller shall have the right within 10 daysfollowing the receipt of notice of Buyers disapproval to elect tocure such Disapproved Item prior to the Expected Closing Date.Sellers failure to give to Buyer within such period, written noticeof Sellers commitment to cure such Disapproved Item on orbefore the closing Date shall be presumed to be Sellers Electionnot to cure such Disapproved Item.

Right to cure is very important it keeps the contractalive; waiving the right to cure can really hurt the seller

Environmental Due Diligence:o Seller does not have right to cure financing or environmental

issues

So if buyer wants to get out of deal, they need to come upwith financing/environmental issue

What is mold? Physical inspection? Environmental? Can


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make an argument either wayo ASTM 1527-E: American Society for Testing and Materials

Industrial group that puts forth different standards toobjectively determine

o Phase I (paid for by buyer):

Requires a review of: the site location

adjacent lots/uses

site operationso what happens on the site?

History-o aerial photos:What were previous uses and

could there be problems there?o Construction

o Interviews: those involved with the property in

the pasto Previous studies

o Topographical map

On site: consultant will walk around the property

Physiographic featureso Geology and hydrogeologyof the property

Water table

Above/underground tankso Like gas tanks that had to be replaced a few

years ago

Hazardous materials on the propertyo If it is manufacturing plant, probably but it

doesnt mean the haz mats arent disposed oflegally but it raises a higher level of scrutiny

Water/waste water/storm watero Waste water:

Septic: many pipes lead to a holding tankand water is slowly leaked back into soil

Sewer: one pipe leading to a treatmentfacility

Centrifuge to eliminate particles

then to treatment facilityo Storm water:

rain water/runoff

does not go to sewer sewer onlytakes waste

Storm drains/sewer has noconnection to the regular sewer.


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o Gets pumped right to ocean

(there is a grid to get rid ofbigger particles)

This is why youshouldnt surf during a

big storm all the junkfrom the street ends upin the water

Solid wasteo Cups, etc.

Regulatory review of databases

Chemicals/substances we look for:o PCBs

Polychlorinated biphenals (dont need toknow)

Banned in 1979)

Used to cool high heat that comes from achange in electrical tension

Florescent lights,Transformers, etco lead paint(1978)

kids like taste because sugary

leads to brain damage

if structure is pre-1978, want to look forlead dust

o asbestos (1978)

mineral

very fine friable asbestos is the key (crushable)

test: if you can crush it in one hand, it isfriable

is asbestos is not friable, it is not aproblem (if it doesnt crush then it cantgo into the air and be breathed into yourlungs)

guys in moon suits need to remove it very expensive

wetlands

o shallow water and vegetation (reeds, etc)

o polluted or affected water that goes through.

o Slight current and pollution gets caught in the

bottomo Rich ecosystems

o Water emerges cleaner than when it went in

o Federal rule: no net loss of wetlands


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This means you can destroy a wetlandbut need to create another wetlandelsewhere

o Artificial wetlands need to be maintained but

there are little regulations on it

Radono Doesnt happen much on the West Coast

more of a Southern occurrenceo A radioactive gas that naturally occurs

o Colorless and odorless

Methaneo Will get this info from environmental report or

from the natural hazard report

Special areas:o Drycleaning

A lot of the machines have been replaced(like gas tanks)

They used to use PCE (polychlorineethylenes) which is toxic and corrosive

Ask:

1. do you clean on the premises?

2. Do you use PCE and have therebeen any leaks?

o Agriculture

Pesticides

DDT banned in 1972o Oil Operationso Mold

Can be environmental or physicalinspection issue

Present everywhere needs water andcellulose to survive

Some types are toxic

Some arent toxic unless in very highconcentration

Building materials used to be more

natural and breathe; movement now togreen materials but they are stillprocessed they let water in but not out

o Environmental laws

o Conclusion/Recommendation

o Targeted Phase II:

Requires permission of seller

Who pays for it?


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More invasive and targeted review of the specific issuesidentified in Phase I

If they find out about something, they have to disclose ito Remediation:

If there is a problem, need to fix it

This is between the seller and the government The government has to approve any remediation that is

done

Is buyer still willing to buy the property, even with delay?How does buyer know seller has enough money toremediate?

o NFA

No further action letter from agency or agenciesresponsible for overseeing the remdiation

o Environmental insurance policy

Can cover the cost of any future remediation that may berequired

Zoning: part ofgovernmental approvals; segregates incompatibleland uses

o State police power > Std State Zoning Enabling Act > cities

(pass zoning ordinances)o 1926: City of Euclid v. Ambler Realty affirmed the right of the

state police power to designate power to zone citieso Euclidian zoning

o 2 things cities must do to pass valid zoning regulations:

must propose a general plan

where do we want the city to be in 10 years? Policy document

Specific plan:

Things to make the general plan a reality

Actual geographic mapping out of the general plano 3 options:

Ordinance:

Permissively

Conditional

1. CUP: Conditional Use Permit

Can only get CUP if city sets forth conditional use Ex: nightclub

2. Variance: you dont have right to construct certainstructure or use for specific use (but other lots in your zonedo have the right)

home in the hills, for exampleo ordinance allows single family homes with 50


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setbacks but because of the odd shape of aproperty they cant build a house to thosespecifications

3. Rezoning:

tweaking the actual ordinance

this is a big dealo seller must apply for these things (buyer has no property rights);

usually buyer covers costs thougho city must find certain facts in order to allow CUP, variance, or

rezoning; even if they want to grant request, they cant withoutfinding certain facts

o can appeal decision but this can be very time consuming

o 1. Historic preservation:

Historic does not mean old

Social value

Culture, era, or particular architect Even if historic, doesnt mean you necessarily have to keep

it from being destroyedo 2. ADA: Americans with disability act

ADA didnt just require buildings to be built withhandicapped access after the Act was passed, but requiredretro-fitting for handi-capped access

Pretty much everything within rx is wheel-chair accessibleo 3. Subdivision map act

property cannot be transferred unless the boundaries ofthat property meet legal requirements

previous transfers can be grandfathered in but all new landmust meet this requirement

anyone who wants to subdivide land, etc. must go throughlegal channels to do so

Title insurance insures property interesto 1. Interests in real property (which are all insurable)

easement: right to use

easement is an interest in land but license is not

fee

simple

life estate lease

lien: mortgage, deed of trust, for exampleo 2. Who owns it

simply because you own one of the above, it does notmean you are the only person who has an interest in theproperty


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bank has a lien (as long as you have a mortgage)

if you rent, someone has a lease

easements: gas, electric cos., for exampleo 3. What is the condition

seller is responsible to deliver preliminary title report to buyer.o PTR: preliminary title report or Commitmentfor title report

PTR: cannot be relied on, not a form of insurance

Commitment: commitment itself is not insurance, but atthe end of the deal if you give the insurance company themoney in the K, it automatically becomes a policy

o PTR lists:

Estate/interest in land

Owner of record

Need signature owner of the interest you want tobuy. Make sure that person is the seller

Legal description

Exceptions

General: carve-outs from the policy

Specific/special: existing exceptions recorded (taxes,easement to gas company, for example)

o Must give buyer underlying documents

Tax map

Buyer will then negotiation with title company

Title insuranceo Covers:

Vesting (owner/interest) No others have an interest in the real property other than

the special exceptions

Off record risks

Others owning an interest in the land

A document that has been forged

Insurance against the incapacity of a party to thetransaction

Defective recording

Access to a public roado Exceptions to Coverage:

Government police power

Condemnation

Title risks known/created by insured

If you know something and dont tell insurancecompany about it, and then that thing becomes amatter of title, the insurance company will say youknew about this, so you arent insured


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This is a drug dealer exception: fed govt has abilityto seize property that has been used for the drugtrade (or purchased with drug money)

Defects revealed by inspection

Failure to pay consideration

Most recording acts only protect people who arebfps. if you get property for nothing, title insurancemay not protect you.

Lack of right to use other property

Matters disclosed by survey

Schedule B/II/2 (special exceptions)

Taxes

Easements right to use property of anothero What is the right that is being given?

o What rights can easement-holder prevent

property owner from asserting? Never let repugnance at a particular provision keep

you from reading entire doc. While one provisionmay be unconstitutional (race based, for example)that doesnt make the entire doc unconstitutional

Liens

Leaseo Confidential contract and you dont want third

parties to know what is in the contract but youdo want to file memorandum of lease so thewhole world will know you have a lease on the

propertyo Oil and gas leases: dont want them to have

surface rights, only to minerals below a certainamount of feet below ground so you can usethe property freely

Surveys:o AIR 9.1g - Survey: buyer has 30 or X days from the receipt of

the Title Commitment and the underlying documents to satisfyitself with regard to any ALTA title supplement based upon asurvey prepared to American Land Title Association (ALTA)standards for an owners policy by a licensed surveyor, showingthe legal description and boundary lines of the Property, and anyeasements of record, and any improvements, poles, structuresand things located within 10 feet of either side of the Propertyboundary lines. Any such survey shall be prepared at Buyersdirection and expense. If Buyer has obtained a survey andapproved the ALTA title supplement, Buyer may elect within theperiod allowed for Buyers approval of a survey to have an ALTA


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extended coverage owners form of title policy, in which eventBuyer shall pay any additional premium attributable thereto.

Basically, Buyer is allowed to perform at its cost a surveyof the property to show not only the boundary lines of theproperty but also what is located on the property and what

is located near the property lineo ALTA/ACSM: American Land Title Association / American

Congress on Surveying and Mapping

ALTA/ACSM land title survey tells you about easements, forexample

o Survey shows easements affecting property, setbacks/required

setbackso If a store, and you need 5 parking spaces, you can buy from the

town for a certain amount of $$ and they use that money inbuilding a parking structure

Existing Leases and Tenancy Statementso AIR 9.1h: Seller shall within 10 or X days of the Date of

Agreement provide both Buyer and Escrow Holder with legiblecopies of all leases, subleases or rental arrangements(collectively Existing Leases) affecting the Property, and with atenancy statement (Estoppel Certificate) in the latest form orequivalent to that published by the AIR, executed by Sellerand/or each tenant and subtenant of the Property. Seller shalluse its best efforts to have each tenant complete and execute anEstoppel Certificate. If any tenant fails or refuses to provide anEstoppel Certificate then Seller shall complete and execute anEstoppel Certificate for that tenancy. Buyer has 10 days fromthe receipt of said Existing Leases and Estoppel Certificates tosatisfy itself with regard to the Existing Leases and any othertenancy issues

unless tenant has expressly given Seller permission to bindthem/sign something that affects them, under K law, thisisnt binding. However, it is sufficient under the AIR

buyer needs something signed by all the tenantso When you buy property, you cant just kick those with leases out.

o Lease review: find out all the leases on the property

o Look at TenantEstoppel Certificate in packet

Means that if tenant signs it, it estops the tenant fromaction violating the certificate

In the certificate:

1. Copy of the lease and all sub-leaseso Sub-lease: assignment of only aportion of your

rights under the lease

2. The current amount of security deposit held byLessor


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3. assurance that the lease has not been modified,orally, or in writing, since its execution. The Leasecontains the entire agreement between Lessor andLessee

4. The improvements and space required to be

provided by Lessor have been furnished andcompleted in all respects to the satisfaction ofLessee

5. Lessee has no knowledge of any uncured defaultsby Lessor or Lessee under the Lease

6. There are no disputes between lessor and lesseeconcerning the lease, the premises or theimprovements therein or thereon

7. Lessee is in full and complete possession of thePremises and has not assigned or sublet any portionof the Premises

8. Lessee has no knowledge of any prior sale,transfer, assignment or encumbrance of the Lessorsinterest in the Lease

9. Lessee has made no alterations or additions to thePremises

10. Lessee is not currently the subject of abankruptcy proceeding and to the best of itsknowledge neither Lessor nor any Guarantor isinvolved in such a proceeding

o money but also those in bankruptcy have right

to choose which leases to keep and which toreject

11. The guarantees of the Guarantors named aboveare still in full force and effect

12. Lessee is aware that buyers, lenders and otherswill rely upon the statements made in this EstoppelCertificate, and has thus adjusted the languagehereof as necessary to make it an accuratestatement of the current facts concerning the Lease.If no such adjustments have been made, said partiesmay rely upon the statements in this form as printed.

Notice of Changeso 9.1(i): Seller will promptly notify Buyer and Brokers in writing of

any Material Change (see 9.1(n)) affecting the Property thatbecomes known to Seller prior to the Closing.

Ex: maintenance agreements

Kublicki pet peeve: laundry agreements

Financing


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o AIR 9.1(j): If paragraph 5 hereof dealing with a financing

contingency has not been stricken, the satisfaction or waiver ofsuch New Loan contingency

o Financing contingency (strike of not applicable)

AIR 5.1:This offer is contingent upon Buyer obtaining

from an insurance company, financial institution, o otherlender, a commitment to lend to Buyer a sum equal to atleast X% of the Purchase Price, at terms rx acceptable toBuyer. Seller shall have 7 days from receipt of thecommitment setting forth the proposed terms of the NewLoan to approve or disapprove of such proposed terms. IfSeller fails to notify Escrow Holder, in writing, of thedisapproval within said 7 days, it shall be conclusivelypresumed that Seller has approved the terms of the NewLoan.

5.2: Buyer hereby agrees to diligently pursue obtaining the

New Loan. If Buyer shall fail to notify its Broker, EscrowHolder and Seller, in writing within X days following theDate of Agreement, that the New Loan has not beenobtained, it shall be conclusively presumed that buyer haseither obtained said New Loan or has waived this New Loancontingency

buyer must use good faith to obtain loano this is because under AIR seller cant cure

environmental or financing so this is a way forbuyer to get out of the deal

5.3: If, after due diligence, Buyer shall notify its Broker,Escrow Holder and Seller, in writing, within the timespecified in paragraph 5.2, that buyer has not obtainedsaid New Loan, this Agreement shall be terminated, andBuyer shall be entitled to the prompt return of the Deposit,plus any interest earned thereon, less only Escrow Holderand Title Company cancellation fees and costs which Buyershall pay

Get a loan from:

Lender (third party)

Seller (Carryback)

Assumption of ?? loan

Types of loan documents

Promissory noteo Debt document

Deed of trusto With deed there are 3 parties, with mortgage

there are 2 partieso In CA, deed of trust has a beneficiary(lender),


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trustee (title co), trustor(borrower)o In a mortgage, you have mortgager(lender)

and mortgagee (borrower)o Deed of trust ties the promissory note to a

specific property

Assignment of rentso Usually in deed of trust

UCC 1o Fixture filing / financing sh?

o Personal property

If you dont pay one month, they want to accelerate theywant to make the whole loan due the next month(foreclosure)

Foreclosure is the process by which the bank attempts tosell the property in order to generate the cash it needs tosell off the loan

2 types of foreclosure:o judicial

o non judicial

even if paying mortgage regularly, if they decide to sellproperty or get another loan on the property, lender wantsright to accelerate the loan. Is that a default becauseborrower hasnt failed to pay, but it has placed lender in amore precarious position

first loan has priority over second loan(subordination)

ex: Lien A for $500k and Lien B for $250 k; whathappens if property is now worth only $500k? Lien Awill take priority which means nothing left for Lien B

SNDA: subordination and non-disturbance agreement

Tenant agrees to subordinate the lien of their leaseto the lien of the lenders lien on the property. Thisagreement only affects subordination of the liens priority. This gives the lender the right to wipe themout if they are in foreclosure.

Why would tenant agree to subordinate theirlien/lease? They get non-disturbance out of it. The

lender promises that if tenant agrees to be a goodlittle tenant, then they will keep them in occupancy(they will not disturb their occupancy).

Personal Propertyo AIR 9.1l: IN the even that any personal property is included in

the Purchase Price, Buyer has 10 or X days from the Date ofAgreement to satisfy itself with regard to the title condition of


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such personal property. Seller recommends that Buyer obtain aUCC-1 report. Any such report shall be paid for by Buyer. Sellershall provide Buyer copies of any liens or encumbrancesaffecting such personal property that it is aware of within 10 or Xdays of the Date of agreement

Contingencies:

o AIR 9.1m: Destruction/damage:

if damage is $10k or less:

Seller has to cure/repair

if damage is more than $10k:

Buyer can approve or disapprove (no cure right byseller at that point);

buyer can terminate agreement within a certainnumber of days of getting notice of greater than$10k damage (usually 10 days).

Buyer can walk and get back deposit.

If they do approve, they approve with no pricereduction.

if Buyer does not elect to terminate this transaction,Buyer shall be entitled to any insurance proceedsapplicable to such loss.

o Material change

AIR 9.1n: Buyer shall have 10 days following receipt ofwritten notice of a Material Change within which to satisfyitself with regard to such change.

Material Change shall mean a change in the status

of the use, occupancy, tenants, or condition of theProperty that occurs after the date of this offer andprior to the Closing. Unless otherwise notified inwriting, Escrow Holder shall assume that no MaterialChange has occurred prior to the Closing.

AIR 12.1i: Notice of changes: seller will promptly notifyBuyer and Brokers in writing of any Material Changeaffecting the Property that becomes known to Seller priorto the closing

o AIR 9.3: If any Buyers Contingency or other matter subject to

Buyers approval is disapproved as provided for herein in a

timely manner, Seller shall have the right within 10 daysfollowing the receipt of notice of Buyers disapproval to elect tocure such Disapproved Item prior to the Expected Closing Date.

Closingso We have finally completed due diligence which is the heart and

soul of purchase and sale. Now we move to the next step


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Closingo On the east coast, there isnt as much done through escrow. In CA,

they use escrow a lot more:

NY Closing

CA Closing

o Time is of the essence clause is in the agreement Means that if there is a specific period of time/date/hour that ismentioned in the agreement and that date/time/hour is not exactlymet by whoever the party exercising the right is, it prevents thatside from saying I did it within a rx period of time of thatdate/time/hour

o AIR 8.8:The Closing shall occur on the Expected Closing Date, or assoon thereafter as the Escrow is in condition for Closing: provided,however, that if the closing does not occur by the Expected Closing Dateand said Date is not extended by mutual instructions of the Parties, aParty not then in default under this Agreement may notify the other Party,

Escrow Holder, and Brokers, in writing that, unless the Closing occurswithin 5 business days following said notice, the Escrow shall be deemedterminated without further notice or instructions

Party that did everything it was supposed to do can askthe other party to close. If it doesnt happen within 5 daysof that, then the deal is terminated

Only five days within notice so minimum five days but maybemore

o Time of the essence is really tough but AIR is wimpy

No hard date agreement gives 5 days leeway to close the deal

Escrow: escrow holder cant just go ahead and close

Dont have enough docs, instructions, or funds

Buyer and seller need to give mirror instructions in order for theescrow to act

Actual closing:o Seller:

Closing instructions

Deed (to transfer real property)

Bill of sale (to transfer personal property)

Assignment and assumption of Ks Assignment and assumption of leases

Estoppel

Settlement statement

List of all the debits and credits in the agreemento Buyer:

$ (including loan)

loan documents


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assignment and assumption of Ks

assignment and assumption of leases

PCOR

Rebuttable presumption

Settlement statement

Debits and credits of buyero Prorations :

Amounts that are split between buyer and seller

Rents (closing might not happen on nov 1 but nov15)

Security deposits

Escrow fees (typically buyer and seller each pay50%)

o Owners title insurance (paid by seller)

o Lenders title insurance (paid by buyer)

o Transfer taxes (tax transfers of prop) (typicallypaid by seller)

Insurance

Taxeso Property taxes

Fiscal year

3 offices for taxes:

1.Assessor come out and assessthe value of your property (march1)

2.Auditor/Controller take valueprovided by the assessor and applytax rate (july 1)

3. Collector collects taxes (nov 1and feb 1 with penalties due onDec 10 and april 10)

o Monetary liens

Not prorations but still need to be paid off

Payoff:

Payoff demand: if you pay off loan by x date (afterclosing), here is the amount you have to pay

o That way escrow knows exactly how muchmoney

Reconveyance / release: title company will giveinsurance before loan is paid off because titlecompany knows that escrow will pay the money

Construction: Why are we constructing something?


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o In todays economy, most buildings are going for less than

construction costso Not much incentive to build new property

o In boom, it is the other way around

o Why do we care?

Architects are paid more for rehabs and remodels thanthey are for new constructions

What: what is being constructed and why that is important?

Who: who are the parties?o Owner: person contracting for the work (not necessarily person

who owns the property in fee)o Architect

plans/max amount of modifications: usually 5; if you wantmore modifications than that you pay by hour

estimate of costs: estimate for what the design will cost to

build before contractor even gets involves permits

reviews/approves certificates for payment: architectreviews certificates for payment (usually every month)

according to Kublicki, this is the most importantconcept in construction

guarantees code compliance

compensation:

for new construction, architect gets 10% ofconstruction costs

for rehab construction, architect gets 15% of

construction costs right of first refusal for the same type of project

copyright for their worko General contractor

o Sub-contractors

Person general contractor hires to do specific work

Ex: electrician, plumber, etc.o Sub-sub-contractors

Plumber will hire a sub to provide pipe being used inconstruction

o Project managers/Representative (person who represents theowner)

Representative is recognized as the person who can legallybind the owner; can rely on what representative says toyour benefit and detriment

o Lenders

o Fun Control make sure money is only dispersed when its

supposed to


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o City permitting agency

o City inspectors

o Insurers

How:o Owner/builder: owner hires sub-contractors directly (saves about

15% of construction costs); according to Kublicki, this is notworth doing; it is a lot of stress and need a lot of expertise

o design/bid/build: architect designs building (which isnt coded but

should be close), you take design and bid it out to differentcontractors, enter into an agreement with lowest bidder (usually)and then they build it

o design/build:dont have a separate architect and contractor, one

group does the same; this is usually used when building highlysensitive or large scale project

ex: dam, nuclear power plant

want designers involved every step of the way in casedesign has to change mid-stream

o turnkey: go to owner of land and tell them what you want; dont

deal with contractor at all; this is usually used by walmart/largeretailers

How:

Physical Constructiono Demolition/ strip down

o Grading work / site work

This is very expensive; probably greatest expenseo Excavation

o Foundationso Structural walls/floors (this is also called framing)

o Roof

o Rough utilities (heating, plumbing, gas, electricity, etc)

o Outer walls/floors

o Interior walls/floors

o Millwork/cabinetry

Millwork: woodwork incorporated into the designo Finish work: painting, glass, staining, etc.

o Cleanup

o

Note: this is a chronological process, have different people doingthe work, each step has different costs and requires differentamount of time

Timeline:o Contract signed

o Construction commencement

Mechanics lien: value of services to construction; date ittakes effect is not when contractor is not paid or


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construction is completed; it relates back tocommencement of construction

o Applications/certificates for payment

This is the heart and soul of construction process

Applications are basically invoices from general contractors

Certificates issued from architect saying they reviewedapplications and they should be paid

o Inspections

To make sure in compliance with city, code, and goodengineering practices

o Substantial completion

No real definition

Term of art

Ultimately courts decide it

Why is it important? Need it to get a TCO (?)o

TCO: temporary certificate of occupancy Gives a list of things that need to be completed in order to

get a certificate of occupancyo Punchlist: things listed in TCO that need to be done

o Final Completion

o FCO: final certificate of occupancy

o Mechanics lien

o Final payment

How much:

3 pricing structures in construction:o 1. Cost of Work + Fee

5-15% - usually 10%

when a project needs to be done absolutely perfectly(nuclear power plant)

this can wreak havoc on budgets because instead ofgetting wood for $500, builder will get it for $1000 becausethey get a percentage of that

o 2. Stipulated Sum Agreement (Stip sum)

owner and contractor agree on a sum; it will not cost more

this means that:

if it ends up costing less, the general contractor

keeps the difference (they keep the savings) if it costs more, contractor makes up the difference

gen contractor has incentive to cut corners because gencontractor buys cheap stuff

use this when plans are very precise and there is a lot ofscrutiny

want to make sure contractor isnt cutting too many


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cornerso 3. Guaranteed maximum price K (Gmax)

best for owner

the contractor guarantees the max price of the K

this means that:

if price goes above max figure, contractor makes upthe difference

if price is below the max, the owner gets the moneyback

pay more on this kind of contract because gen contractortakes more risk

instead of paying 10% will pay 15%, most likely

increasingly popular

When do we pay?o Not paid upfront

o paid at the end because no contractor can ride out the costs;also not secure enough for contractoro Contract sum gets paid over time, during construction

Paid throughprogress payments

Not total cost divided by projected amount of time tocomplete

Paid based on invoices which reflect cost of work done themonth before

Require following docs from contractor before startingwork:

Schedule of costs: how much different types of workare going to cost and at what time they will beexpended

Schedule of Anticipated Monthly Disbursements

Progress payment timeline: (usually paid once amonth)

1. Gen contractor sends an application for paymentto owner

2. Architect reviews the application

3. Architect can either send application for paymentback or can issue a certificate for payment

o certificate for payment is certification in writingsaying lender or owner can go ahead and pay

4. Money is paid to general contractor

5. General contractor pays the subcontractors

Alternative plans:o after step 3 the owner/lender can pay the subs

directlyo Withholds/Retainage: every time owner pays


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amount that has been certified they retain apercentage (5-15%). This results in paymentfor substantial completion. Gen contractorshave paid subs and everyone and thisretainage is enough to pay for the work that

needs to be done between substantialcompletion and actual completiono 10% is usually contractors profit so they want

to make sure that they get that. Owner wantsto make sure that during the process thepeople who need to get paid are paid. Oncethe contractors have done the work they aresupposed to do up until the very end, thatswhen you release the retainage

its like a carrot

Each Application for Payment should include:

% + list of work completed list of materials delivered/purchased/incorporated

(R+W)

copies of all the sub contracts which have not yetbeen received

copies of all inspection reportso inspections required by law and good

engineering practices

updated project schedule/schedule of costs/scheduleof anticipated monthly disbursements

o

want to make sure not only what the costs arebut that everything that needs to be completedis being done in accordance with the workschedule

o want to know if project is running behind

o project schedule will show whether you can still

meet the deadline despite the delayso conditional release of lien from gen

contractor/all subs

conditioned on making the paymento unconditional release of lien

Timeo Bookends: beginning and end

o We want aproject schedule

How much work will be done

What work will be done

When it will be doneo While sometimes contractors and owners have control often


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there are significant changes (there are always changes but onlysome are significant)

o Change order: formal written procedure by which a change inconstruction is requested and its time and costs agreed to

Typically when construction has already begun and you are

locked in with subso Make sure:

Only have contractor stop work on the area that needs tobe changed not all construction

Also need to agree about how to pay for change orders

Lump sum

Cost and savings analysis

Arbitrationo Baseball arbitration: usually meet in the middle

o Types of delays:

Foreseeable events/weather Unforeseeable events/weather

General Contractor delays

Compare where GC is at relative to project schedule;tell them to speed it up; if they dont, can terminatethe agreement for cause; can have a daily penaltyfee for GC that arent getting things done.

ret outline

Documents