Managing the complexities of a forward purchase

 

As the supply of desirable investment real estate has tightened, real estate investors have increasingly utilized the so-called “forward purchase” to acquire real estate. In a forward purchase, the parties to the transaction enter into a definitive agreement prior to the asset being fully constructed and operational. While forward purchases may be appealing to both buyers and sellers, the structure necessarily brings greater transactional complexity and an increased risk profile.

Below are a few of the more important issue for the parties to consider.

What Does Construction Completion Mean?

Construction completion is the most significant condition to closing in a forward purchase.  The meaning of “completion” may appear straight-forward on first blush, but the parties may find themselves in dispute if they failed to discuss the specific meaning at the outset of negotiations. For example, does it mean that the asset may be lawfully occupied for its intended use – in other words, substantial completion? Or, does it mean the asset has been fully constructed, including all punch list items.

How is Construction Completion Verified? 

In addition to ensuring that the standard for construction completion is as unambiguous as possible, the parties must also designate an appropriate arbiter to resolve any potential dispute. While a seller generally prefers to designate its architect as the deciding party, a buyer will typically push for a more neutral deciding party.

What Safeguards are Available to Manage the Complexity? 

Buyers should consider the following safeguards before entering into a forward purchase:
1. Obtain the right to perform confirmatory diligence (i.e., updated title, survey, and inspections upon substantial completion).
2. Obtain monitoring and approval rights over material aspects of the construction.
3. Require a post-closing punch list escrow agreement to secure the performance of unsatisfied work.
4. Require the seller to assign all applicable construction warranties to the buyer following completion of the work.

Taft’s real estate team is here to help you navigate the complexities of a forward sale. We leverage our size, skills, and depth of industry knowledge to help our clients mitigate risk and avoid obstacles. To learn more, contact Cleveland partner Chris Tazzi at ctazzi@taftlaw.com or visit www.taftlaw.com.

 
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    The U.S. Department of Labor (DOL) issued a new final overtime rule on September 24, 2019 that increases the Fair Labor Standards Act’s (FLSA’s) salary-level threshold for white-collar exemptions from $455 per week ($23,700 annually) to $684 per week ($35,568 annually). This overtime rule goes into effect January 1, 2020 and is estimated to extend overtime protections to an additional 1.3 million workers nationwide who are currently ineligible under federal law.

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    Mark Turner and Cindy Menta can be reached at mt@gertsburglaw.com, or by phone at 440-571-7773. 

    An audit of your policies can help you avoid the pain of lawsuits. The Gertsburg Law Firm now offers CoverMySix, a one-stop legal audit for your business, led by award-winning litigators and in-house counsel. CM6 minimizes your exposure to lawsuits, investigations, disgruntled employees and customers, and all the damage that comes with them. Schedule a confidential, no-cost CM6 Vulnerability Check with Gertsburg Law Firm’s CEO, who will walk you through the minefields in your documents and key processes and tell you how to fix them yourself. Call 440-571-7774 or e-mail cz@gertsburglaw.com to schedule your CM6 Vulnerability Checktoday. Newer or smaller companies will want to take advantage of CoverMySix for Small Companies and Startupscomplete legal documentation portfolio. Check out covermysix.com to learn about the full CM6 audit suite.

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    Want to learn more? Give us a call at 440-878-5930 or email us at cosebenefits@medmutual.com for consultation and advice on your healthcare options. And to learn more about the COSE MEWA, visit www.cosemewa.com.

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    Patrick Britton from NOCHE spent time with NEOSA recently to share their expertise in planiing, launching and optimizing a tech company's internship program.

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