Q&A Topic: Due Diligence in Commercial Real Estate
Q. Why do I need to conduct due diligence before purchasing commercial real estate? What does it entail?
A. You wouldn’t buy a used car without looking under the hood, would you? Without a thorough review of the physical, legal and financial risks of a potential investment in commercial real estate, what looks like a great deal can quickly turn into your worst nightmare. Before committing to purchase commercial real estate, you should conduct a comprehensive review (i.e. due diligence)—including an environmental assessment; title and municipal records review; a survey; an engineering and building inspection; a zoning analysis and a review of any leases and financial information (such as real estate taxes). Each aspect of due diligence will likely require hiring third parties (such as an environmental consultant) to study the property and provide you with a report summarizing the findings. Ideally the due diligence should be completed prior to signing the contract. If you still need to carry out due diligence after the contract is signed, then it is very important that the contract be contingent for an appropriate period of time so that you can get comfortable on what you are purchasing. If you sign the contract and it does not have appropriate contingencies, and then you discover something you do not like, unfortunately you will either have to close on a property you actually don’t want or default on the contract and risk losing your deposit or worse, end up in litigation with the seller.
Q. What advice do you give to prospective buyers of commercial real estate?
A. Make sure that you have enough time (either before signing the contract or, if after signing the contract, then during your contingency period) to hire third parties and get any reports completed. For example, a Phase I environmental report can take three weeks or more to be completed. If you are getting a loan to finance the purchase, make sure you have discussed the deal with your bank (and ideally get a letter of intent from the bank) before you sign the contract – then make sure your contract is contingent on you getting a commitment from the bank for a mortgage. If it is a new development deal, then make sure you have done a thorough zoning analysis and hired an architect to at least create preliminary drawings to confirm that you can construct what you want to build on the property.
Q. What distinguishes your firm from others who practice commercial real estate law?
A. Before I turned to the dark side and became a lawyer, I practiced as a civil-environmental engineer where I managed large international environmental projects for real estate development. My combined engineering and legal experience uniquely prepares me to carry out due diligence and risk analysis on behalf of real estate investors and developers and then to negotiate and close the deal. My deep legal experience in real estate also allows me to advise clients on all aspects of sophisticated commercial real estate deals and I can do the work at an hourly rate that is much less than larger law firms. If specialized legal knowledge is required on a deal (such as international law or securities regulations), I can bring in a customized legal team from my professional network at a similar hourly rate to mine and I will quarterback the team on behalf of the client. A few of the projects I have worked on in Westchester include: new development of a 80,000 SF building with 94 units for a student residence in New Rochelle; assemblage of parcels in Port Chester for a future large mixed use development; new development of a 65,000 SF building with 60 market rate rental units and ground floor retail in New Rochelle; and the construction and sale of a 9,000 SF luxury single family house in Rye. On these projects I provide comprehensive real estate legal services from due diligence and acquisition of the land, corporate structuring with investors through to negotiating and closing the construction financing.
Q. What can I do to decrease my legal fees?
A. Although it sounds counterintuitive, the best way to reduce legal fees is to hire an attorney as early as possible in the process. Ideally, you should hire an attorney to help you with the initial term sheet or offer. Often potential clients will call me and say that they want to engage my firm just to “draft the contract” and “do the closing” because “all the terms” with the seller have already been agreed upon. However, in realty even though you may have an agreement on the business terms, there are so many legal aspects of a deal that you may not be aware of which actually change how you view the business terms as a buyer. So what ends up happening is the attorneys spend time drafting and negotiating the contract, the legal issues come up, you as a buyer are no longer happy with the business terms, and then the attorneys have to spend more time to go back to the drawing board to try to make the deal work. My opinion is that it is better to view your attorney as an advisor. In my practice I like to take an in-depth, holistic approach to helping my clients— kind of like a consigliere—and I do this by carefully understanding your future plans and the business reasons of why you are investing in a particular real estate deal. We can work together to identify your risks at an early stage and make sure both the legal and business terms of the deal match those risks, which at the end of the day allows for a more efficient contract negotiation and a smoother closing while at the same avoiding unnecessary legal fees.
About Tomlin Law, PLLC
Tomlin Law PLLC is a boutique law firm based in New York City and Westchester that provides sophisticated advice for a reasonable price. The firm is focused on reducing the risk for our clients without unnecessarily compromising the deal. We are also committed to an open and transparent billing process. The firm focuses on commercial real estate, corporate structuring and businesses transactions. We work with clients who wish to pursue a wide range of commercial real estate projects in new development, acquisitions, dispositions, construction loan financing, leasing and design-build. Tomlin Law also provides legal counsel on a wide range of corporate issues for real estate and business transactions such as joint ventures for development projects, operating agreements for partners looking to buy or invest in real estate and negotiating and closing the sale or purchase of a business.
John Tomlin’s combined engineering and legal experience has allowed him to develop a niche in carrying out due diligence and risk analysis on behalf of real estate developers and investors and then to negotiate and close the deal. Prior to becoming an attorney, John practiced as a professional engineer and is LEED® AP certified through the Green Building Council for sustainable green buildings and construction. He earned his law degree from Pace University School of Law, and his engineering degree from Queen’s University in Ontario, Canada and the University of Western Australia. John has been selected as a top rated real estate attorney in New York by Super Lawyers© for the last three consecutive years (2015-2018), and received the Rising Star “40 Under 40” Award from the Business Council of Westchester in 2010. John is admitted to practice law in New York and Connecticut.
John Tomlin, P.Eng., Esq., LEED® AP
Tomlin Law, PLLC
To discuss your real estate project or corporate transaction, call (646) 790-5812.
New York Office: 733 3rd Avenue, 15th Floor, New York, NY 10017
White Plains Office: 199 Main Street, 4th Floor, White Plains, NY 10601