Commercial Real Estate Syndication: Controlling the Property

Getting Control of the Property

We’ve been discussing the method of assembling groups of investors for the purpose of acquiring income producing commercial real estate. As we move to acquiring the property into escrow so that you can verify its suitability for investment, we will need to look at keeping control of the property for sufficient time to total your investigation.

Your goal is to control the property without risking any of your funds. The Seller’s objective is to extract as much cash as feasible from you as quickly as achievable to tie you to his property. So how do you structure your obtain contract to maximize your time although minimizing your exposure? Utilizing well structured contingencies is the answer.

As the Syndicator of group investment, you require to perform a Due Diligence investigation of the property. This is essentially a verification of the statements made by the Seller as to the condition of the property, the status of the leases, the history of income and expenses, the state of title, the existence of natural and man-produced hazards, and anything else that can impact the value of the property. It is acceptable to make your purchase (and your deposit) subject to your approval of all of these conditions. Stating these conditions in your purchase contract turns them into contingencies, because your completing the buy is contingent upon accepting the all of this data as stated by the Seller.

There are two “special” contingencies you’ll want in your obtain provide when you are developing a group investment. The very first 1 is that you can cancel the transaction if you cannot totally subscribe your investment group in a specific period of time. Fundamentally, if you fail to raise the money in time, the transaction is canceled and you get your deposit back.

The second is to permit you to vest the property in an additional name. This might be some thing as simple as “John Doe or assignee” in the Purchaser section of a regular actual estate contract. This is really essential to your “survival” as the Syndicator. It is this capacity to assign your obtain rights under the contract to the LLC that gives you an chance for ownership in the group investment.

As a practical matter although, Sellers can get uncomfortable with lots of contingencies that have lengthy removal periods and could wait for a quicker buyer. An acceptable option is the use of an Option to Purchase. The Choice gives the choice holder (you) an irrevocable correct to buy the property in the time period specified in the option. Possibilities also tend to be much less “expensive” that escrow deposits since no 1 is acquiring tied up in buy contract. The downside for you is that your choice payment is non-refundable. If you don’t buy the property, your alternative payment (referred to as “option money”) is gone.

Alternatives can range from a week to a year, even though most fall into a three to 6 month period. It is also possible to pay a modest quantity of income for a shorter period, say a month, in what is often termed a “free look.” Why it’s called a “free” look when you’re paying a few hundred dollars for it is one of those time-honored business oxymoron’s, but it possibly relates to the comparatively small quantity of cash for the brief term alternative compared to the longer term ones.

Realistically, you would want to structure your option to have an extension period if you discover you want the property. Of course, you’d will need to pay much more cash with each and every extension. Even when making use of an option, you’ll still want to have your contingencies in location when you submit the purchase contract. The difference is that you’ll have much less time in which to approve of them.

So now you have the two approaches in which you can control a prospective investment property for sufficient time to complete your investigation and raise the funds with which to buy it. Great hunting!