Customary Land Purchase Terms

3 Replies

In a commercial land purchase transaction in Northern California with the value of under $10M, what is customary for the terms below?

- earnest money deposit - is 3%, 5%, 7% or higher customary?

- duration of the non-financing contingencies period?

- duration of the financing contingency period?

- if Buyer wants to extend the contingencies period, what should Buyer pay for a 30-day or 45-day extension?

Many thanks for all substative input!

In commercial, there is really no "standard". Everything is negotiable. There are common practices in certain areas, but even those are negotiable. As far as earnest money, it's not even always a percentage. The deposit is not supposed to be indicative of the deal size, but the fair liquidated damages in the event that the deal goes south. In that case, since the seller still owns the property, the damages (other than carry costs) should be the same as a 5 million dollar deal. People may have different opinions, but I try to limit any deposit to under $250,000 total. My advice would be to offer $100,000 at signing and another $100,000 at the end of the due diligence period.  

I'm not sure what you mean by "non-financing period"? As far as the financing contingency, it should be a reasonable amount of time for you to get a commitment. So if you are already working with a lender you are comfortable with, 30 days might suffice. If you are just starting our your search for a bank, maybe 60 days is more realistic. You can always build in a 15 days extension so long as you are actively and diligently pursuing financing but have not yet received a commitment. You would only have the extension for the purposes of financing, not to terminate for any other reason. If they need an additional deposit, I would offer $25,000 to be applied to the purchase price, NOT non-refundable, which a lot of sellers will try. 

As far as extending the inspection period, that's worth a lot more money, especially if you are able to cancel for "any or no reason" during that time period. I would suggest trying for a 30 day extension so long as you are diligently pursuing, if they require more money up (which I wouldn't offer initially!), $50,000 is reasonable, again, applicable to the purchase price if you close, but refundable if you terminate in accordance with the contract. The alternative is not spelling that out in the contract, but if you run into an issue, you can negotiate an extension for just that particular issue, so let's say you had to do a Phase II and your report didn't come in yet, you can extend the inspection period for however many days your vendor expects it to take, but you can only terminate if an environmental issue is revealed in the report, not for "any or no reason" anymore, not if you don't like something on a new report you decide to get, or on a survey you already had, etc., just that limited issue. Most sellers are amenable because they've had the property off the market and they are knee deep in the transaction with you already, plus, any buyer would likely need to deal with the Phase II issue, so it's worth it for them to agree.

All of this, of course, depends on your bargaining position. How bad does the seller need you? If they are motivated or the property has been on the market a long time, there's some more leverage. If they have 5 other offers on the table, I would tread a little more lightly.

Finally, on a deal that big, there's almost certainly going to be a lawyer on the other side. I can't stress enough how important it is in these types of deals to have good representation!

Hope this helps some! Best of luck!

Thank you, Jessica, for the thorough response!  We certainly intend to retain legal counsel after we negotiate the term sheet for this deal.  Currently, we are negotiating the due diligence period and the EM deposit.  I have offered $100K and Seller is OK with that, but they are not willing to give me a long enough diligence period.  The offer only 60 days and I want at least 90 days.  I just offered that we agree to that I'll have an option to extend the diligence period by 30 days, for which I would pay a non-refundable $30K toward the purchase price.  They are OK with that, but they also want the initial $100K to go hard (i.e. also become non-refundable) at the end of the initial 60-day diligence period if I do not cancel and exercise that 30-day option to extend.  Is it common that the initial EM deposit goes hard after the initial diligence period if I pay a non-refundable chunk to extend that period?  Thanks again!

No, not common at all. You can always continue doing tests and your deposit will be on the line after the due diligence period. The whole point of paying for the extension is to get a longer period that your money isn't hard.

60 days really isn't unreasonable unless there is some major environmental or permitting issue you need to delve into. Most reports come back within a couple weeks, max. Same with surveys and title. If you use a good lawyer and good 3rd parties, you should be ok with 60. Better than losing $130,000, which makes no sense at all.

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