If you’re in the market to purchase commercial real estate in California, you’ll need to know how to negotiate a purchase agreement. This can be a daunting task, but if you’re prepared and know what to expect, the process can be much smoother.
Term sheets and letters of intent
The first step in any commercial real estate transaction is the issuance of a term sheet or letter of intent. This document outlines the general terms and conditions of the deal, including the purchase price, contingencies, due diligence period and other essential elements. Meticulously reviewing this document before you sign it is vital because it sets the tone for the rest of the negotiation process.
Purchase price
There are a few different ways to approach the purchase price during negotiations. You can either start high and come down to meet the seller in the middle or start low and let the seller come up to meet you. There is no right or wrong answer here; it all depends on the market conditions and your own personal strategy.
Contingencies
These are clauses that allow you to back out of the real estate deal if certain conditions are not met. For example, a common contingency is a due diligence clause, which allows you to walk away from the deal if you’re not satisfied with the results of your due diligence investigation.
Due diligence
This is the process of investigating the property and ensuring that it meets your expectations. You may want to hire a qualified inspector to look for any potential problems, such as water damage, mold or structural issues.
Understand California laws about commercial real estate transactions
Some key laws that you should be aware of to avoid roadblocks in the future include the Commercial Real Estate Purchase Agreement Act and the Subdivision Map Act. The Commercial Real Estate Purchase Agreement Act requires that all purchase agreements for commercial real estate be in writing and that the seller disclose certain information about the property to the buyer. The Subdivision Map Act governs how property is divided into smaller parcels, such as when a large piece of land is being subdivided into smaller lots for development.
Buying commercial real estate in California will be one of the biggest and perhaps riskiest undertakings you’ll ever do. But by knowing what’s required of you and the steps to take, you can better position yourself for a successful purchase.