Commercial Real Estate Dispositions 101: A Primer for Receivers
By Cavanaugh, Kevin*
(This concludes the outstanding article on preparing commercial real
estate for sale, begun in our Winter issue. The first portion stressed the
importance of complete and clear disclaimers to protect the receiver and
the six topics every disclaimer should address. Part Two walks the
receiver through preparation of confidentiality agreements,
pre-qualification of buyers and completing the transaction. Ed.)
Like disclaimers, confidentiality agreements are extremely varied. There are core critical items that belong in any well-crafted confidentiality agreement, however. Here is a non-exhaustive list of those critical items (again, commentary in parentheses):
The terms “we” and “us” are meant to include the plaintiff, the defendant, any lenders or stakeholders, the receiver and, of course, anyone associated with those parties. In our litigious society it is naïve to believe that even the most bullet-proof confidentiality agreement (or disclaimer, for that matter) will shield the receiver from all lawsuits. The confidentiality agreement together with the disclaimer should provide valuable defenses for the receiver if the matter winds up in court, however.
Now, assuming all goes well, the receiver may receive an offer or letter
of intent from a prospect. What does the receiver do next?
A simple request for financial statements, references and details of recently completed real estate transactions with contact information for the parties involved will assist the receiver in the investigation. While in theory obtaining this information should not be difficult, it often is. Resistance to a receiver’s request should be a flashing red light indicating that the receiver is probably dealing with an unqualified buyer.
Another method to obtain this information is to require that it be included with any written offer, as a condition of the offer’s validity. A receiver may need this information to substantiate the fact that he or she was acting in the best interests of the receivership estate, so obtaining this information at the outset of the transaction is a good idea.
Once obtained, the receiver must verify and analyze the accuracy of the
prospective purchaser’s business information and financial statements by
contacting the parties and references identified. Furthermore, the
internet should be used in this exercise to perform a basic search of the
individual prospect’s name (and entity name, if applicable). Finally, the
receiver should use her/his own industry contacts to find out what is
generally known about the prospective purchaser. By using such attorney,
lender, vendor, real estate broker and tenant contacts, the receiver will
probably be able to assemble a representative file on the prospective
purchaser’s track record and reputation. This information will enable the
receiver to make a well-supported recommendation about the advisability of
continued negotiations with a given prospect.
I purposely have not discussed either the negotiation of an offer or the resulting contract, as the multitude of nuances associated with the “art of the deal” is a subject unto itself (as are the legal protections that should be integrated into a commercial real estate contract).
Nor have I attempted to address how to best determine the adequacy of a given offer. Suffice it to say that market knowledge equals power. A receiver can be instrumental in facilitating a sale of commercial real estate by crafting a well-thought-out confidentiality agreement and by carefully compiling the required due diligence information, bringing substantial value to the marketing and selling process.
*KEVIN P. CAVANAUGH, CPA is the Managing Director of Douglas Wilson Companies' San Francisco office. He is also a licensed real estate broker in the states of California and Florida and has participated in more than $1 billion in commercial real estate sales.