When optimizing your real estate portfolio, it’s important to recognize when an asset has become unsupportive. In other words, the asset no longer adds value to your business. As a next step, some organizations turn to disposition to help them divest the asset no longer in line with business strategy.
The disposition process involves five phases: selecting a strategy, due diligence, marketing, negotiations, and closing and documentation.
When concluding a disposition, the goal is to ensure all details and documents of the transaction are finalized. During this phase, organizations often work with a trusted real estate advisor to review all documents and conduct the following closing activities.
Reviewing Final Disposition Transaction Documents
During the negotiations phase, a letter of intent is drafted. The terms outlined in the letter of intent are then incorporated into the drafting of the purchase and sale agreement.
The purchase and sale agreement solidifies a real estate transaction between buyer and seller; in this case, the transaction is the asset disposition. Unlike the typical letter of intent, this agreement is legally binding.
All terms and negotiations outlined in your purchase and sale agreement should match the terms included in your letter of intent. A good real estate advisor will have solidified all negotiations between stakeholders before moving forward.
Drafting a purchase and sale agreement can be a lengthy process, as it contains large amounts of information, including the sale price, involved parties, representation information, and required documents.
The purchase and sale agreement should also contain an overview of several closing processes, including:
- Title and survey. Title work determines the marketability of the ownership interest and identifies encumbrances, such as easements, mortgages and other liens. Surveys are used to determine the perimeter of a property, and the location of any improvements, easements and/or encumbrances, calculate the site acreage, and serve as evidence that the state of the land matches what’s described in the purchase and sale agreement.
- Due diligence period. During due diligence, the buyer is primarily responsible for exploring the financial, legal, physical, and environmental aspects of the property.
- Earnest money. Earnest money is a deposit put down on a property to signal the buyer’s serious intentions. Some buyer and seller teams choose to work with an escrow agent, a neutral third party who helps manage funds and mitigate trust issues in a transaction.
- Special clauses. Most commercial real estate transactions do not require the addition of any special clauses. They are generally drafted on a case-by-case basis when needed.
- Contingencies. These clauses detail conditions that need to be met before a contract is legally binding. When working with these clauses, keep an eye on due dates to avoid the hassle of missed deadlines and expired contingency periods.
- Closing date. The amount of time after the due diligence period, special clauses, and contingencies have been met, that the sale must close.
A series of closing activities must be completed before the purchase and sale agreement can be officially signed.
Final Disposition Closing Activities
During the closing and documentation phase, it is often the responsibility of the buyer to complete the necessary closing activities, prior to completing the transaction. The buyer may identify issues, such as title defects, that need to be resolved by the seller according to timing outlined in the purchase and sale agreement. It’s also crucial to ensure compliance with other contract parameters, including any due diligence guidelines, waivers, and contingency periods.
The most common required items include the following.
Title and Survey
One of the first requirements of a purchase and sale agreement is the ordering of title work to determine the marketability of the seller’s ownership interest, as well as identify any encumbrances and encroachments, many of which can be plotted on survey.
Completing and obtaining an American Land Title Association (ALTA) survey is an important part of the disposition closing process, and often the responsibility of a buyer. While other types of pre-purchase surveys do exist, this is the most common.
Obtaining an ALTA survey is the responsibility of the buyer; a new one should be requested when the existing survey is older than six months. As a seller, it’s important to be aware of the legal description of the property and other concerns like encroachment or property access.
Due Diligence
By this point in the disposition process, you should be familiar with the four types of due diligence in commercial real estate. However, this is the buyer’s final opportunity to ensure all financial, structural, legal, and environmental factors have been addressed.
Once all closing activities are complete, it’s time to close on the transaction. When all parties and stakeholders are satisfied with compliance of the terms of the transaction, final signatures are obtained for closing documents, such as the deed, the escrow settlement statement, the mortgage, if applicable, from the seller, buyer, and lender, if applicable.
When the property’s title and funds have been transferred, your unsupportive asset is officially divested. Now it’s time to revisit your portfolio optimization strategy and take the next step in aligning your commercial real estate portfolio with business goals.
Learn More Strategies for Unsupportive CRE Assets
Corporate real estate optimization is fundamental to achieving your business goals and responding to new challenges. Learn more ways to address unsupportive assets in your CRE portfolio by downloading our free guide, Portfolio Optimization: The Essential Corporate Real Estate Guide.
