Spring 2006 • Issue 21, page 5

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.)

Confidentiality Agreements
Much of the information assembled for dissemination to potential purchasers may be sensitive and require safeguarding. The receiver loses control of the information upon dissemination to a broker or potential purchaser, however. For this reason, the receiver should obtain a properly executed confidentiality agreement from persons to receive the information prior to delivery.

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):

1. The information being provided is gathered from what are believed to be reliable sources (as was the case with the disclaimer, the difference between belief and reality could be enormous);

2. The receiver makes no representations or warranties regarding the information’s accuracy and will have no liability in the event that it is wrong (again disclaimer-type language alerting the recipient that he / she should independently verify all information);

3. The information provided will be kept confidential by the recipient (and anyone remotely associated with the recipient who has access to the information);

4. The information provided and any information, analyses, etc. derived from the information must be returned by the recipient immediately upon request (compliance verification with this provision could be problematic, if not impossible); and

5. The recipient will defend and hold the receiver harmless for any misuse of information or breach of the confidentiality agreement (if you release this information and anything bad happens, you are paying our attorney fees).

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?

Qualification of Buyers
Once a potential purchaser delivers a letter of intent offer to purchase the property the receiver must qualify the prospect. This is important to avoid wasting your valuable time and that of the court, the parties and the involved attorneys. Working through the purchase and sale agreement only to discover that the buyer is either financially incapable of completing the transaction or is disreputable does not benefit anyone. A receiver will need to research both the financial capabilities of the potential purchaser and his/her/its reputation/track record to avoid winding up in this unpleasant situation

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.

Conclusion and Disclaimer
As the title of this article suggests, this discussion is only intended as a primer and is not an exhaustive discussion of the mechanics of sale of a commercial real estate asset. As is always my practice, I highly recommend that each receiver consult with his or her own legal advisor as to how best to handle the documents and procedures I’ve discussed as they relate to each particular property and situation.

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.