Commercial Office Building Acquisition

Commercial Office Building Acquisition

December 22, 2008

Prepared By

Stephen I. Berkman

San Francisco, CA

2www.paulhastings.com ©2008 Paul, Hastings, Janofsky & Walker LLP Confidential - not for redistribution

Purchase and Sale

Agreement Negotiation


Letter of Intent

Typically the first stage in documenting a purchase and sale transaction is the negotiation and drafting of a letter of intent. The letter of intent is a non-binding document which sets forth the key business terms regarding the transaction including:

• Price• Amount of Deposit(s)• Length of the Due Diligence Period• Closing Date• Allocation of Closing Costs• Treatment of Existing Financing (e.g. sale free and clear of loan, assumption of

loan, etc.)• Other material terms


The Purchase and Sale Agreement

Once the parties have executed a letter of intent, the attorneys representing the Seller will typically prepare an initial draft of the purchase agreement. The Purchase Agreement will set forth all terms and conditions related to the purchase and sale of the property, typically including, the following:

• A legal description of the land and improvements to be purchased and a description of the leases, contracts, personal property and intangible property to be acquired in connection with the sale

• Purchase price, earnest money deposit(s), due diligence period and closing date• Terms and conditions upon which the Buyer may access the property to perform

its due diligence investigations• Representations and warranties given by the Seller concerning the property• Covenants of the Seller to maintain the property in its existing condition pending

closing• Conditions precedent to closing (e.g. receipt of tenant estoppel certificates,

lender consent to loan assumption, etc.)• Documents to be delivered by the parties at closing, the allocation of closing

costs and the proration of taxes, rents and other operating expenses


Formation of “Buyer” Entity

In order to shield the parent company from liability and to facilitate either the assumption of the existing loan or future financings of the property, a new "bankruptcy remote," single-purpose entity (an "SPE") will be formed to take title to the real property.

The SPE will be a wholly-owned subsidiary of Buyer. For tax purposes, typically the SPE will be a newly formed Delaware limited liability company qualified to do business in California.

This can occur prior to or after execution of the Purchase Agreement, so long as the Purchase Agreement allows for assignment to affiliates.


The Earnest Money Deposit

Upon execution of the Purchase Agreement, the Buyer will typically make a deposit into an escrow account held by a title company.

The deposit will be held in an interest bearing account and will be fully refundable if Buyer terminates the Purchase Agreement prior to the expiration of the due diligence period.

The deposit will be applied toward the purchase price at closing.

If the transaction fails to close due to the Buyer's default after the expiration of the due diligence period, then the deposit will be paid to the Seller as liquidated damages.


The Due Diligence Phase


Due Diligence Generally

The Buyer will typically be granted a period ranging from 30-90 days in which to conduct all investigations related to the condition of the property, including:

• financial condition of the tenants and confirmation of all assumptions related to the valuation of the property

• review of lease documents and estoppel certificates received from tenants• the structural condition of the building • the environmental condition of the property• review of zoning, entitlements and other governmental approvals applicable to

the property• review of title documents and a survey of the property• review of loan documents• review of service contracts (if any) to be assumed at closing and any other

documents related to the property• receipt of any required internal or external approvals and consents


Due Diligence Generally (continued)

If the Buyer is unsatisfied with any aspect of the property discovered during the due diligence period, then the Buyer may terminate the purchase agreement in its sole and absolute discretion and receive the return of its deposit.

If the Buyer discovers adverse conditions which affect the Buyer's initial valuation of the property (e.g. unexpected capital repairs, unexpected environmental remediation, unpaid tenant improvement allowances, etc.), then the Buyer may also negotiate a purchase price reduction to address those issues.


Financial Analysis

The brokers representing the Seller will typically have prepared an offering memorandum which is a glossy brochure containing information essential to the valuation of the property.

During the due diligence phase, the Buyer will evaluate the factual accuracy of the offering memorandum and other assumptions used to initially determine the purchase price set forth in the Purchase Agreement.

The Buyer may also commission a third party to perform an appraisal of the property to confirm valuation.


Lease Review and Estoppel Certificates

The Buyer's attorneys will review and prepare abstracts or summaries of the leases.

Lease review will confirm the core financial terms of the leases (e.g. rent, escalations, term, extension rights, expansion rights, etc.) used to determine cash flows and the valuation of the property.

Lease review will also identify any tenant concessions which may affect expected cash flows (e.g. free rent, unpaid tenant improvement allowances, termination rights, etc.).

After the closing, the lease abstracts also provide a handy summary for quick reference purposes regarding the terms of the leases.


Lease Review and Estoppel Certificates (continued)

The Seller will also solicit estoppel certificates from the tenants which will confirm:• The Buyer has been provided a complete copy of the lease• There are no known defaults under the lease • The tenant's understanding of other key business terms of the

lease• Negotiation point in the Purchase Agreement as to whether all

estoppels must be received as a closing condition

In this case careful attention will be paid to lease expirations and renewal rights and expansion rights of existing tenants.


Title and Survey A title company will prepare a preliminary title report confirming that the Seller is the

owner of the property and setting forth all matters of record relating the property.

The Buyer will engage the services of a licensed surveyor to prepare an ALTA/ACSM survey of the property which will confirm, among other things, boundary lines, acreage, building footprint, building height, zoning and flood classifications, the location of all improvements located on the property and the location of all easements affecting the property.

Attorneys for the Buyer will review the preliminary title report together with the survey to ensure that the property has adequate access, there are no encroachments, there are no restrictions which would adversely affect the use of the property and there are no unknown monetary liens.

Attorneys for the Buyer will also negotiate with the title company the form of the title policy and any endorsements thereto. Among other things, the title policy will insure that the Buyer is the owner of the property and that there are no unknown items of record affecting the property.


Environmental Review

The Buyer will engage the services of a licensed environmental consultant to prepare a Phase I environmental report for the property.

The Phase I report will evaluate prior ownership and historical use of the property, the listing of the property on databases regarding environmental compliance and other documents related to environmental matters. Surface level soil samples may also be collected.

If any issues of concern are raised by the Phase I report, the consultant may recommend performing a Phase II report which typically requires test drilling and collection of ground water to determine if there are any adverse environmental issues.


Building Physical Evaluation / Zoning Entitlements

A third party consultant will perform a thorough inspection of the structural portions of the building and all building systems (e.g. HVAC) to evaluate the physical condition of the building.

The consultant will identify items in need of repair and other capital improvements necessary to keep the building in good condition and repair.

The Buyer may also order a letter from the City in which the property is located confirming the zoning for the property and that no code violations are on file with the City.

The Buyer may also engage a consultant or architect to prepare a "zoning report" which will independently confirm the property's compliance with zoning code requirements.


Approvals and Consents

Board of Directors Approval – Depending upon Buyer’s internal approval process, Board of Director approval will need to be obtained either prior to execution of the Purchase Agreement or prior to expiration of the due diligence period.

Lender Consents – If the existing loan will be assumed, then the consent of the lender will be required.

Governmental Entity Consents – Most permits, licenses and other governmental approvals relating to the property (e.g. elevator license, certificate of occupancy, etc.) are freely assignable. If any consents to assignment are required to assign these items, then they will be identified and obtained.

Service Contracts – Buyer will need to determine whether it intends to assume service contracts related to the property (e.g. elevator maintenance, security/fire alarm monitoring, landscaping, janitorial) or have the Seller terminate those contracts at closing. If any consents to assignment are required to assign these contracts, then they will be identified and obtained.


Property Management and Leasing Agreement

In order to ensure a seamless transition of the property, prior to closing, the Buyer will need to negotiate a property management and leasing agreement with a professional third party property management company.

Upon closing, the property management company will handle the day-to-day management of the property (e.g. preparation of budgets, collection of rent, building maintenance, etc.).

If the existing loan will be assumed by the Buyer, the lender may require the execution and collateral assignment of the property management agreement prior to closing.


The Existing Financing


Options for Addressing the Existing Financing

There are several options regarding how the Buyer and Seller may address the existing financing for the property, including:

• Prepayment – If permitted by the loan documents (or agreed to by the lender), the Seller may prepay the loan in its entirety. A penalty may be owed in order to prepay. The loan is typically paid at closing out of the sale proceeds.

• Defeasance – The loan documents may permit the deed of trust recorded against the property and securing the loan to be removed in a so-called "defeasance" transaction. In a defeasance transaction, government backed securities (e.g. bonds and treasuries) are substituted for real property as security for repayment of the loan. Given current interest rates, this loan can be quite expensive to the Seller.

• Loan Assumption – The Buyer may assume the loan, in which case, upon closing, the Buyer will become responsible for repayment of the loan and all of the other obligations of the Seller under the loan documents.


Loan Assumption

If the loan is to be assumed at closing, then attorneys for the Buyer will undertake a detailed review of the loan documents to confirm the financial terms (e.g. interest rate, maturity date, operating covenants, etc.) and other obligations set forth in the loan documents.

If the loan will be assumed, then the lender will require detailed financial information regarding Buyer in order to evaluate the company's financial condition and ability to perform under the loan documents.

The lender may also require a parent guaranty of certain non-recourse carve-outs under the loan documents.

The Buyer's attorneys will negotiate the documents regarding the assumption of the loan and otherwise coordinate with the lender's attorneys to cause the loan to be assumed.


The Closing Process


Escrow

Closings in California are accomplished through an escrow agent, which is typically the title insurance company.

Documents required for closing (e.g. deed, assignment of lease, bill of sale) are executed by the parties and delivered to the escrow agent.

If the loan is not assumed by the Buyer, then the escrow agent also coordinates with the lender to obtain the necessary documents to cause the deed of trust to be removed as a lien against the property.

The Buyer wires funds to the escrow agent on or before closing to close the transaction.

Attorneys for the Buyer and Seller coordinate all aspects of the closing with the escrow agent on behalf of their respective clients.


Closing Process

Prior to closing the escrow agent will prepare a detailed closing statement setting forth the purchase price, deposits, credits, prorations and allocation of closing costs. The closing statement will set forth the precise amount the Buyer will need to wire into escrow in order to close the transaction.

Upon receipt of all funds and documents, the escrow agent will cause the deed to be recorded, the title policy to be issued to the Buyer, originals of the closing documents to be delivered to the parties, the loan to be paid off (if applicable) and funds to be wired to the Seller.

Upon closing, written notice will be delivered to the tenants of the building regarding the sale and instructing them to pay rent to the Buyer.


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