DOING BUSINESS IN CALIFORNIA Real Estate Transactions Part 2 Basic - - PowerPoint PPT Presentation

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DOING BUSINESS IN CALIFORNIA Real Estate Transactions

Part 2 – Basic Elements of Real Estate Sale and Purchase

Presented by: Noriyuki Shimoda Admitted in Japan and California Squire Sanders (US) LLP Phone: 415-393-9894 Email: noriyuki.shimoda@squiresanders.com February 15, and March 21, 2012 Palo 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

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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

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Negotiation and Execution of Letter of Intent

• Seller and Buyer negotiate for and agree on

basic terms and conditions of the sale and purchase agreement in Letter of Intent which is 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 of Purchase 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

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Negotiation and Execution of Purchase and Sale Agreement

• Major Provisions of Purchase Agreement

(cont.)

• Costs and Expenses
• Prorations
• Representations and Warranties
• Damage and Destruction
• Brokers
• Assignment
• Miscellaneous
• Exhibits

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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

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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

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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

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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)

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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

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• 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

• r 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

• bligation to documents that are “within the

Seller’s possession or reasonable control”

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

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• 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

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

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• 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

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

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• 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

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

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• 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

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

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

–

To the extent possible, limit representations and warranties to “Seller’s knowledge.” Include narrow definition of “Seller’s knowledge”

–

Carve out the information disclosed to, or discovered by, the Buyer

–

Do not give real property title representation

–

Do not give representation as to physical condition of the property.

–

OK to give narrow hazardous materials and compliance with laws representations Important Provisions of Purchase and Sale Agreement and Joint Escrow Agreement from Seller’s Perspective

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• Seller’s Representations and Warranties/As-Is (Cont’d)
• Pre-closing Breach of Representations/Warranties.

–

Include “Seller favorable” mechanism for representations and warranties that are found to be 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 Important Provisions of Purchase and Sale Agreement and Joint Escrow Agreement from Seller’s Perspective

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• Pre-Closing Remedies
• Seller’s remedy

–

The customary pre-closing remedy for the Buyer’s default is termination of the agreement and recovery of liquidated damages

• Buyer’s remedy

–

Attempt to limit the Buyer’s pre-closing remedy for the Seller’s default to termination of the agreement, a return of its deposit and reimbursement of its reasonable out-of-pocket expenses up to a cap

–

Expressly exclude all other remedies, including specific performance Important Provisions of Purchase and Sale Agreement and Joint Escrow Agreement from Seller’s Perspective

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• 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

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

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• 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

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

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• 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

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

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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.

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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.

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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.

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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

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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

• ther 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

• f 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.

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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.

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Form 593-C CA 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
• f 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.

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Form 593-C CA 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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