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Behind the Scenes of a Closing
How to avoid three legal speed bumps on the road to closing a deal.
Legal review is often the last line of defense in development deals to identify potential issues before it’s too late. In today’s market, lenders are becoming increasingly selective about the deals they approve and less willing to take on risky investments they might have considered a year and a half ago. As a result, every aspect of a deal is scrutinized more closely, making it essential for legal and development teams to collaborate effectively to present the strongest case possible and ensure the deal is successfully completed.
Not all development professionals know exactly what goes on behind the scenes during legal review, but they can take certain actions upstream to help legal build an airtight case. No two deals are alike and, inevitably, surprises come up. On the flip side, many steps of legal review are routine, and the same issues turn up repeatedly. The following examples are among the most common and easiest to resolve.
Environmental Review: Not All Phase 1 Reports Are Created Equal
Given the level of unknowns, possible issues, and strict requirements from lenders, environmental reporting has the potential to hold up or even crater a deal if not everyone — on both sides of the transaction — understands the requirements.
Phase 1 environmental site assessment (ESA) reports are a perfect example. Some sellers assume that if their site had a clean Phase 1 ESA in the past, that will be sufficient for the buyer. However, a buyer must conduct their own Phase 1 report (a reliance letter is not enough) to meet the “all appropriate inquiries” standard, the industry’s standard process for evaluating a property’s environmental condition. Although it is unusual for drastic inconsistencies to emerge between the seller’s and buyer’s Phase 1 reports, multiple databases and sources can be referenced for these reports. So, even if the seller has a clean Phase 1, it is possible that the buyer’s report could identify an environmental issue that does not fit the deal’s underwriting.
Another consideration around review is timing, since environmental reports must be dated within six months of close to be valid. That means if the due diligence period is long and environmental reports were completed early on, they may need to be updated for the closing.
Avoiding the Title and Survey Runaround
A careful early review of a property’s title and survey — either by the development/diligence team or as a joint effort between development and legal — can head off numerous issues that could ultimately hold the deal up in final legal review.
First and foremost, this step confirms for the buyer that the title matches the property for purchase and ensures the seller owns the entire contiguous parcel. It’s not unheard of for a seller to believe they own everything within the “four corners” of a parcel, but the deed subsequently reveals gaps, such as a section of an adjacent alley or an area that belongs to an abutting property. This exercise can also identify easements that, without amendment, could interfere with site plans or hinder access for construction.
Early review of a property’s title can also uncover any outstanding liens and give the legal team a head start unsnarling those complications. For example, a title shows a mortgage loan on a property, plus an older loan that should have been extinguished when the mortgage was put in place but was never released. In that case, the legal team ends up chasing down a release from the individual or lender who holds that lien. This could potentially be a bank that is no longer in business, requiring a tremendous amount of sleuthing and legwork to resolve. The earlier those issues are brought to attention, the more likely it is the legal team can successfully address them without affecting the closing timeline.
Covering Zoning From A to Z
A legal team typically gets involved with zoning only to confirm that it is what it should be, that it shows up correctly on the survey, and that it matches what’s on the zoning report required by lenders.
However, from the development perspective, everything related to zoning should be carefully reviewed before an offer is put in on the property. It’s important to not make assumptions. If a parcel would make an ideal industrial site, the developer needs to confirm that it is zoned as such — even if the immediate area supports the use — or make sure a pathway exists for zoning change. Teams may need to dig deeper than the obvious answer to confirm their specific planned use is permitted. For example, a site might be zoned for general manufacturing, but that could still exclude certain types of manufacturing outlined in the zoning code.
Finally, anyone in an in-house legal department should be able to read and interpret zoning code, but if a parcel is not zoned “as of right,” it can be beneficial to hire local zoning counsel. When it comes to navigating the zoning change process, local zoning attorneys have the connections and power to make it happen. This is particularly valuable for high-volume developers that are active in multiple markets. It is not practical to be familiar with the zoning process in numerous municipalities, so it is more efficient and more effective to outsource that expertise when needed.
Moving Deals Forward
Legal teams sometimes get the reputation of being deal breakers when they should be viewed as deal-makers — important partners in ensuring all the necessary details are in place so a deal can move forward. Establishing a level of trust with the legal department, knowing what its members bring to the process and making sure they are operating with all the information they need helps pave the way to smooth closings and successful deals for everyone involved.
Jen Nichols is executive vice president and general counsel at CRG.
