How to Make an Offer on a Commercial Building

A commercial offer rarely begins with a full contract. Maynard Nexsen says purchases often start with a term sheet, sometimes formatted as a letter of intent, in which the parties settle primary terms such as the property description, price, earnest money, inspection period and closing date. Miller Nash notes that a letter of intent can also serve as written authorization to begin due diligence, an outline for a board, and something to show a lender or investor.

Keep it short. Bean Kinney describes a two-to-six page document written from a business perspective, faster and considerably less expensive to negotiate than going straight to a contract. Buckingham, Doolittle & Burroughs suggests three or four pages and warns against turning it into a detailed recitation of every term.

Short does not mean casual. Bean Kinney recommends bringing your attorney in at this stage, because it is very hard to negotiate away from a point agreed in a signed letter of intent. Miller Nash makes the same point in softer terms: even with a non-binding letter, naming a term, especially price, can leave a party feeling morally committed to it.

A strong offer is built on preparation that a seller can sense in the terms you propose. Work through these steps before the letter goes out.

1. Define what you need from the building: size, power, parking, loading, zoning and location. A seller's flexibility is of little use if the building cannot work for you.
2. Find out what the seller wants, if you can: speed, certainty, a leaseback period, or a particular closing date.
3. Review the property's available information, comparable sales and any asking price logic. An appraisal comes later, but your price should have support now.
4. Talk to one or more lenders, so that you know what they require and how long their process takes.
5. Decide what entity will buy, with your attorney and CPA, or preserve the right to assign to one.
6. Check your current lease, so your closing and move dates fit your exit.
7. Set your walk-away price and terms in writing inside your company before negotiation starts.

Sources differ a little on the list, but the core is consistent. These terms are worth covering, drawn from the items Maynard Nexsen and Buckingham, Doolittle & Burroughs recommend, plus points that often matter to an owner-user.

• ✓Is the property described precisely, including land, building and any personal property or equipment included?
• ✓Is the price stated, with how it will be paid?
• ✓How much is the earnest money, who holds it, and when would it become non-refundable?
• ✓How long is the due diligence period, when does it begin, and what access do we get?
• ✓What seller documents will be delivered, and by when?
• ✓Are there conditions we need, such as a zoning confirmation or financing?
• ✓When is closing, and are any extensions available?
• ✓Will the building be delivered vacant, or do existing tenants or a seller leaseback stay?
• ✓Who is the buying entity, and can the contract be assigned to a related entity?
• ✓Will the agreement be as is, or will it carry surviving seller representations?
• ✓Is the broker commission addressed? Miller Nash notes many letters of intent do so.
• ✓When does the letter expire if it is not signed?

Bean Kinney advises raising non-routine terms now, including a sale that is completely as is with no surviving representations, because they should not surface for the first time in the contract. If your business depends on a particular item, such as a power upgrade or a truck court, the letter is the place to say so.

This is the legal trap in an otherwise simple document. Miller Nash warns that most letters of intent are labeled non-binding, leading parties to expect that they have no obligations, but that this is rarely true, and that the issue has been at the center of numerous court cases. It describes cases in which conduct after signing, including announcing a deal, led courts to treat a non-binding letter as binding. Buckingham, Doolittle & Burroughs calls that a rare circumstance and describes promissory estoppel as one route to it. Results depend on the facts and the state.

Three drafting points follow, all for your attorney to handle:

• State clearly what is not binding, and that no party is bound until a formal agreement is signed.
• State clearly what is binding. Maynard Nexsen recommends a term sheet that is non-binding except for a requirement that the seller negotiate exclusively for a set period. Others commonly include confidentiality, as Bean Kinney and Miller Nash note.
• If you will enter the building for inspections before the contract is signed, Miller Nash notes that an indemnification provision is often worth addressing.

Exclusivity is often the term a buyer most needs to be binding. Without it, the seller can keep marketing your offer while you spend money on diligence.

Sellers compare the risk of each offer as well as its price. Miller Nash observes that some parties will show a letter of intent to others to shop the deal, so expect your terms to be used if you have no exclusivity. The factors below tend to come up when an offer is being judged, and each is something you can address directly.

• Certainty of closing. Larger deposits that go hard sooner and fewer conditions reduce a seller's risk. They raise yours, so offer them only as far as your diligence and lender schedule allow.
• Time. A shorter due diligence period is attractive. Michigan practitioners note the inspection period is often heavily negotiated, and that a shorter period usually calls for stronger seller representations, so the two trade against each other.
• Financing. Maynard Nexsen says commercial contracts do not often include a financing contingency. If you need one, explain why and how quickly the lender will decide.
• Credibility. A brief explanation of who your company is and why it needs the building can help, especially for a younger business with limited financials.

Expect counters. Decide in advance which terms you would trade. A longer diligence period may be worth a larger deposit that goes hard later. A later closing may be worth a small price concession if it lines up with your lease exit. Put each round in writing, and be clear whether a response is a counter or a discussion.

Be careful with your own conduct as well. Given the case law Miller Nash describes, avoid statements such as we have a deal, and avoid announcing the purchase before the formal agreement is signed. Then move quickly. Maynard Nexsen says a signed letter of intent does not make the contract a formality, and that controlling the first draft is often a good idea. Agree on a date for the first draft, and on when due diligence will begin. Buckingham, Doolittle & Burroughs suggests holding off on due diligence costs until the letter is signed.

Tenant Advisory Group represents the buyer on the search and in the negotiation, including comparing the offer against market evidence and coordinating dates with your attorney, lender and other advisors. We are a broker and not a lender, so your financing terms come from your lender.