All Forum Posts by: Barry Ruby

Whether or not a buyer wants to include "and or assigns" in a contract is a personal choice. However, if the choice is made to have those words in the heading of the contract, it is highly recommended that additional language is added to clarify its meaning.

In order to effectuate an actual assignment, the seller will be asked to execute a formal assignment that transfers the contract to the assignee. If the seller refuses or pushes back on executing the assignment agreement the parties will have a contract dispute on their hands. 

Adding language in the body of the contract clarifying assignment that states something like: "The has the right to assign this contract without the consent of the seller" is the strongest clarifier the buyer can have. If the seller balks at the buyer's right to assign without the seller's consent, the next best clarifier is something like this: "The buyer has the right to assign this contract subject to the seller's written consent which shall not be unreasonably withheld".

Personal experience has taught me that leaving the contract silent on the intent and methodology of how assignment is executed is a bad idea. If the seller is going to have issues with assignment, its highly advised to make sure the assignment will actually happen rather than hope that its meaning is fully understood by all parties to the contract...including the assignee.

Vagary works in both directions. If the seller refuses to execute an assignment agreement, the seller has the buyer over a barrel. If the seller agrees to assign subject to its "reasonable" agreement and fails to do so, the buyer has the seller over a barrel which leaves the buyer claiming the seller to be unreasonable.

It is much better to get all of this sorted out up front by writing a contract that fully spells out the parties intent and understanding if "and or assigns" is included in the contract.

Hi Nathan,

If you are working in an area where there is lot of activity and competition, you do need to be able to "act fast". Having the debt and equity capital in hand or at least lined up will allow you to make an offer you can perform on. It will/should also inform and shape the offer you will make on the property and to more accurately assess the financial performance of the transaction you are structuring.

Introducing yourself to lenders and letting them know that you exist and qualifying them to understand their focus in making loans, their underwriting practices and the terms and conditions they would offer you if and when you found a deal that matched the lender's criteria makes a lot of sense. Prequalifying a lender should and then presenting your investment to them should not leave them hanging.

I have been doing pro forma analysis since the mid 1960's with primary focus on ground up development for a wide range of project types (shopping centers, multifamily, land deals and commercial solar PV). I recently became interested in acquiring apartment projects and have found the information presented in  Seller OMs to be misleading. The data coming from the selling side often presents the project on a pro forma basis, that is, income and expenses are shown as the deal "could be" rather than its actual historical performance.

Due Diligence should begin with gathering and analyzing the income and expenses as they are since that is what you are buying. Assuming the rents you think you can generate in the future, the expenses you think you will need to cover future rents and any capital costs needed to be invested to produce future cashflow are all in the Buyer's court. 

Running a side by side pro forma analysis of "what is" and "what could be" on a line item comparison is both highly recommended and should form the basis of your offer. This kind of analysis forms an objective picture that demonstrates what you are buying compared to what you think you can turn the project into after its purchase. It also forms the basis for what you feel the fair and reasonable purchase price should be compared to the asset value you think you can create after you buy it.

Conducting pro forma analysis in this way employs but mitigates any sales "puffery" that may be in play and, speaking personally, allows me to maintain my blood pressure at a healthy level.

@Nic Stergion Nic it’s not the pro forma that’s misleading it’s the party that produces and presents it.

It’s your personal responsibility to analyze and amend it to reflect reality as you believe it to be and act on the performance that comes from your own independent due diligence.

Hi Allyn,

The risks and challenges associated with renovation are far greater than new, ground up construction projects. New construction provides the ability to control design and allow for the introduction of present and future "state of the art" design and technology. Renovation demands the envisioned "highest and best use" of the property honor existing physical construction realities that will meet current codes required to entitle, build and operate the planned renovated project and its uses.

Historical renovations introduce an additional layer of constraints that must be met. If this property is historical in the sense that it is on or may be placed on a historical register, the renovation project will also have to conform to a set of conditions that will generally have to do with maintaining all or significant portions of existing architectural elements such as facades, building materials and colors.

Historical or not, any planned project will have to be heavily vetted in terms of existing conditions and projected uses for all major building elements such as structural, electrical, plumbing, mechanical and ADA and ANSI provisions. Determining existing conditions and the scope and cost of renovating them and other project scoping requires time, money, patience, as sense humor and maybe even an attraction to pain :). 

On the issue of cost alone, getting a handle on existing conditions will require finding a set of professionals with renovation experience to assess each trade and provide a cost to repair, replace or redesign what each of them is looking at. Engaging the same or perhaps other or additional professional help may also be required. All of which generally involves the payment of what can be pricey fees and time.

In order to rationally engage and pay for the kind of services noted above, you need to gain control of the property so that you know that you are not trying to score without having possession of "the ball". In order to negotiate a document that provides control (a contingent lease or purchase and sale agreement), you need to do some preliminary development and pro forma analysis which should form the basis of key terms and conditions (purchase or lease pricing, the timing and amounts of earnest money and a due diligence program/schedule/budget) of the acquisition document to get to a stated closing date. The closing date should be contingent on having the project at a shovel ready state which generally means that the project is fully entitled with debt and equity capital committed.

Last, mitigating the construction risk is a lot harder to do for a renovation vs new construction. Renovation work involves a great deal of room for the general contractor and subs to encounter unforeseeable problems in the form of what is contractually called "hidden conditions". These situations, if encountered typically become engineering and construction problems that are ultimately solved with the developer's money.

You are encouraged to do a bit of due diligence before spending an inordinate amount of time on this (or any development project) by:

- Determining the highest and best use you see for the property

- Running a pro forma to understand the project's value (sales or capitalized rental income) to see if the project makes sense financially 

- creating a project schedule and pre-development budget

-Using the above data to approach the school district to see if they will work with you based on an offer that you make to them that is informed by your due diligence and try to get the property under contract if you can come to terms with the district with a closing date you think you can meet

You may well discover that the school district would prefer or may even be bound to dispose of the property thru an RFP process, that is a "request for proposal" where you and anyone else can throw your hat in the ring to see who produces the most attractive (to the district) proposition. Even in this event, if you conduct the initial due diligence as suggested above, your chances of "winning" the RFP should be greatly enhanced over those of your competition.

I hope this helps to address your questions. Please let me know if I can be of any assistance to you and good luck if you elect to proceed with the project.

@Deepika Tandon

Based on my experience most companies that offer Cost Segregation studies will perform a complimentary report that they purport to be a conservative projection you can expect if you elect to use this accounting method.

The quoted cost of the formal study varied widely (from a low of $X to $5X$).

Please Send me a PM if you’d like to discuss this in greater detail.

@Clenvic Cayme

Do you have a formal contract with this GC? If you don’t this was your primary mistake. A binding agreement with a GC is critical on many levels.

Spelling out issues such as pricing, scope of services, payment amounts and progress of work, insurance, bonding, indemnification, dispute resolution, penalties and prevailing party provisions to name a few.

Rule 1: never let the GC get too far in front of you payment wise. Never pay a large up front chunk of the contract price (doing so gives the other party all or too much leverage and is a disincentive for them to complete the job as it was initially structured).

If all efforts to get the GC to perform as agreed fail, your only recourse with or without a written contract may be small claims court depending on the laws in your state concerning such matters.

I can share a contract I have drafted with you. Let me know how I can send it to you if it does.

Hi Michael,

I would be happy to discuss MF development potential for part of this property. Please let me know if you'd like to chat. 

Hi Angel, 

I started buying raw land to develop shopping centers about 50 years ago. Over the entire 1/2 century I have NEVER found a situation where "price is not an issue".

Zoning, density, product, price point, on site, off site, hard cost, soft cost and other expenses associated with what uses that are ultimately planned for any site all dictate the amount a developer can pay for a given piece of property.

Land cost is one of the most flexible variables a developer has to play with (unlike, cost of funds, construction and permitting costs). My approach to finding the price that can/should be paid for any planned piece of land is to work backward from determining the 100% value of the project planned to go onto the property and use the following approach to figure out how much the land cost needs to be:

1. Determine the total built-out retail value of the Project: If it is a "for sale product" then the use the gross sales price if it is income property, use the capitalized value of the rental income. If it is some for sale and some rental income then use both to determine retail (market value).

2. Determine and deduct a "reasonable" development profit from Market value. Reasonable should equate to the developer's assessment of the risk/reward she/he is willing to take for doing the project.

3.  Deduct commissions, closing costs, on/off site costs, hard and soft costs.

The residual number that results from the above noted drill will give you the price/value that can be paid to the landowner and represents the land cost that is supported by the project planned for that property.

Along with running these numbers, the most prudent method of purchasing the property is to structure a purchase contract that provides enough time for the developer to secure all of the permits required to build and operate the project AND all of the debt and equity capital required to fund and carry it to sell out and or reaches rent occupancy target. 

The way to determine the functions noted above is to do a detailed critical path analysis that reflects development program milestones. These milestones should be used to frame the terms and conditions of the land contract. These factors should form the basis of the land buyer's purchase offer for critical deal points such as the timing and amounts of the payment of forfeitable earnest money, the closing date and if needed payments of additional earnest money to extend the closing date if need be to allow for final permitting and secure project capital.

The last thing any developer wants is to need to meet a closing date prior to having a fully permitted and funded project. If closing is required before a project reaches that happy day of being permitted and funded, the developer stands to lose all of the time and capital it has sunk into the project  or be left with having to plead and negotiate with the seller for more time. This situation leaves the landowner/seller in complete control of the situation (and property) and places the developer at the mercy of the seller...not a good place to be at all. It is important to understand that while any contract documents commissioned by the developer (site plans, construction docs, engineering work) belongs the developer. The bad news (for the developer) is that all of the entitlement work (annexation, zoning, land use, density) runs with the land and belongs to and benefits the property and its owner.

If you have developer clients that really believe that price is not an issue you have indeed found a group of rare birds. 

@Chris Petzy A new study shows that 40 million Americans live in flood zones vs the 14 million estimated by FEMA. Fish are swimming in the streets of Miami. The United States of America has has opted out of the Paris Climate accord and has taken the official position that climate change either doesn’t exist and or is a hoax. Given the above FACTS, we need to get set for a whole lot more flooding and the concerns that should and will consequently go along with them. On the bright side I may be able to fish off my backyard patio in Colorado in the the too distant future.