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By: Mariana Fradman, MBA
Have you ever thought about becoming a real estate paralegal? And not only a real estate paralegal, but a commercial real estate paralegal? Good for you! I found that a real estate deal has a life unto itself and coming to the closing is in some ways similar to approaching the finish line of a corporate challenge marathon. You prepared and practiced for many days; you ran and came to the finishing line. The only difference is that after the award ceremony, there is more work to be done.
I would like to show you some of the main points regarding what is expected for a paralegal who would like to join a commercial real estate practice. The good news is that the life of a real estate deal on the residential and commercial sides are not too different. The bad news is that commercial real estate properties are very different from residential properties with regard to assessing value and, as a result, the commercial real estate deals are more complex and time and labor consuming. In both cases, you will see documents that appear similar, are named similar, smell similar, but the commercial property types have one major component that the residential property is missing. It is the continuance and stability of the income stream from the property. As a result, you need to know, learn to recognize and overcome many major obstacles in this type of deal.
So, first of all, each real estate deal goes through five stages of its life: due diligence, negotiation, pre-closing, closing and post-closing activities. Simple, isn’t it? But where do paralegals fit? Everywhere…Yes, I know, a paralegal is not involved in the negotiation process. However, who is drafting schedules to contracts most of the time? Who does revisions and prepares riders? You betcha – most of the time, it is you, the paralegal. So, you can’t bring the purchase price down because the property looks like a row of dilapidated shacks after a tornado when a seller insists that he is selling a modern shopping mall, but you can assist your attorney who, in this case, represents a buyer in preparing the contract that is in the best interest of your client, a buyer.
The first stage where real estate paralegals are actively involved is due diligence. What is due diligence and how can you assist with it?
The due diligence process is a comprehensive audit review that involves review of the real estate, financial, corporate, engineering, environmental and other documents related to the transaction to assist the buyer (or lender) to quickly identify potential issues of concern with a property. Due diligence is a paper intensive, time consuming and detail-oriented process which requires what paralegals can do best: thorough analysis of documents under rather pressing deadlines. The main function of due diligence is to verify, verify and verify one more time. Literally, EVERY document concerning the property MUST be examined. We are talking about the deed, title policy, survey, including legal description, engineering plans, zoning requirements, environmental reports, leases with any and all extensions and modifications, notes and mortgages, guarantees and warranties, certificates of occupancy, insurance policies, elevator maintenance contracts, licenses, parking lot contracts, laundry contracts, utility companies agreements, rent rolls and payment history, utility, tax and water bills, employees payrolls, physical inventory of furniture, fixtures, equipment and supplies, litigation history, including details of any past or pending litigations, corporate documents including organizational structure, formation documents, list of states where the company is authorized to do business…the list can go on and on. Usually, the due diligence process walks hand in hand with the negotiation, so, the purchase agreement will be your guideline of which documents will cross your desk at one point or another during the process and, based on the results of due diligence, the deal can be “killed,” re-negotiated, stalled or moved forward.
Please make a note that your list of required due diligence items will grow over time and you may end up with a box — if not boxes of documents. Why? Because during the process, new information is discovered, additional back up documents are required and requested and…the deal may be renegotiated or restructured. You will start your review, if not completely over, from somewhere in the middle and continue with the same fast approaching deadlines.
REMEMBER: no matter how many documents you need to review, you have to read every word of every document (lease, easement, agreement, etc.). Make notes of things you don’t understand or need to clarify. Then give a report to your supervising attorney. He or she will review documents as well, but your notes will create a road map and help to expedite the decision. Keep in mind that you are on the front lines of the due diligence process and the items you flag will show your diligence and assist your attorney in making the right decision. There is no substitute for thorough due diligence and it is a paralegal’s role to assist during it.
So, where do we start? The first step is to prepare a due diligence checklist. Did I tell you that from now on your second name will become “Mr. or Mrs. checklist?” A real estate paralegal quickly becomes the king (or queen) of a checklist. I am sure that during the course of the deal you will have more than one of them. Multistate/multiproperties deal? A checklist for title reports. A checklist for surveys. A checklist for zoning reports. A general due diligence checklist. A checklist for a checklist – ok, that may be overkill.
The list below shows just a few items that belong to a preliminary due diligence checklist. In a course of your deal and thru years of experience, you will develop your own “master” checklist:
- Title Reports and their status
- Surveys and their status
- Zoning Reports and their status
- Engineering Reports
- Environmental Reports
- Financial Records
- Rent Rolls
- Business Licenses
- Third Parties Agreements and Contracts (utilities, trash, telephone and internet providers, management, union contracts, etc.)
- Existing Loan Documents (notes, mortgages or deeds of trust, guaranties, assignments, etc.)
- Liens (including UCCs, tax liens, bankruptcy, litigations) on a state and county levels
- Tax Returns
- Pay Roll including names, positions, wage rates, and benefits
- Physical inventory of furniture, fixtures, equipment and supplies
- Utility bills (water, sewer, gas, electric)
- Bank Statements
- Phone system documents
- Computer system documents
- Fire System inspection reports
- Property tax bills
- Organizational Documents
Depending on which side of the deal you are on, the list will be adjusted to reflect your priorities and details.
In addition to the review of documents, your job will be to timely order and follow up on due diligence items like title reports, zoning reports, updating surveys, order searches (tax and lien searches, pending litigations, UCC searches, bankruptcy searches, etc.). Remember to keep your horse in front of the wagon – a closing checklist plays an important role in this process. It should be timely, updated and you should keep your team members in the loop. Did I mention that updates should be done on a daily or hourly basis? Depending on how intensive the process is and when your deadlines become DEADLINES, your updates should reflect the status of the deal in real time.
Don’t forget that you will be a liaison between numerous parties and stakeholders and your job is to keep your attorney appraised on all developments. The checklist plays an important role and shouldn’t be taken lightly. You don’t want to find yourself in a less than ideal position when you got a telephone call from an attorney, who needs the status of a particular deal for a conference call that is scheduled in…10 minutes…and you haven’t updated your checklist for the past two days.
The last item on the sample due diligence checklist I posted above lists organizational documents. Organizational documents themselves could create a separate checklist. It will include Organizational Chart of the Selling (or/and Buying) Entity, certificates of formation or articles of incorporation of Seller (or/and Buyer), good standing certificates, authorizations to do business in other states, charter documents, certificates of formation or articles of incorporation of subsidiary companies of Seller (or/and Buyer), etc. etc. Don’t forget to include resolutions, waivers and consents of members, as well as incumbency certificates.
Due diligence continues well after the purchase agreement (contract) is signed and the deal is on. Again, depending on the deal’s structure, you will need to follow up with third parties (landlords, tenants, insurance companies, and “new” and “old” lenders) and walk the regulatory labyrinth.
The only way to be on top of your checklist and keep your sanity is to add one important column to your list: due dates. Every party you contact will give you delivery dates. Be real. Many times, due dates will be broken. You need to know your time frame and be persistent.
Another important point is that you need to know how to manage your team players. Yes, you hear me right – you can manage a team by…
- Keeping a checklist up to date
- Delivering results in a timely matter
- Delivering bad news as soon as you hear them
- Preparing a game plan on how to resolve the obstacles
- Manage Egos and Personalities
It is not as hard as it sounds, but remember, don’t overburden your team players with too much information and deliver results. By following those two simple steps, you will be ahead of the game.
What happened if you have questions? Don’t hesitate to ask them. Don’t forget to take notes when you get answers. In general, if your questions related to a survey or title report, pick up a phone and give a surveyor or title company a call. I have never come across an unfriendly surveyor or a nasty title underwriter. They are on your side of the deal and it is in their (and your) best interest to clear obstacles before they become problems. The same is true with zoning reports. Environmental reports are usually reviewed by environmental law specialists within your company or by lender’s in-house specialist and there is no much you can do there.
When you receive the results of lien searches, most of the time, they will come in a manageable table or summary format. Again, depending on your deal, you will need to advise your attorney which UCCs need to be terminated or assigned. However, information about any tax liens, pending litigations, mechanical liens or bankruptcy cases should be delivered to your attorney as soon as practical, if not immediately.
Congratulations! The due diligence period ended…
Be sure to watch for Part II of this article! Mariana will host a “due diligence is completed” party…and we’ll move on to the next phase of the deal: Pre-Closing.
Calling all real estate paralegals – do you have anything you’d like to share regarding a day in the life? What do you love or loathe about your job in the real estate realm? We’d love to hear about your personal experiences and learn from you…so share away!