February 20, 2013

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Sage Advice for Real Estate Investors

Ryley Carlock & Applewhite Client Alert
By Zachary LaPrade and Darrell S. Husband

The Arizona real estate market is improving fast. There are signs of life from local homebuilders, raw land is actually selling in the southeast valley, and the market for finished lots is hot and becoming more competitive.  Permits are up too.  Buyer appetite for commercial properties is increasing.  Infill projects in Phoenix are also picking up, with smart, build-to-suit projects fitting the needs of exciting, new companies.  So, with the prospect of new real estate business, what can investors, developers, principals, owners, landlords and other real estate players do to limit their legal exposure as the real estate market shifts? Here are some key things to discuss with your lawyer:

  1. Limit your personal guaranty. "Not-to-exceed" guarantees and "burnoff" guarantees are not common, but they should always be the starting point for a personal guaranty. Guaranty litigation was booming in the last 4 years, and the parties that negotiated a fair, balanced guaranty structure came out on top.

  2. Be upfront with your partners. Making decisions in an operating agreement can sometimes be frustrating because the scenarios seem so far fetched, but it's better to expect the unexpected. For instance, partners sometimes ask, "Am I really going to exercise a shotgun buy-sell, or exercise my tag-along rights?" The answer could be yes, so formalizing buy-out provisions and other critical provisions of your company's operating agreement with your partners before any dispute arises will help make the lifespan of a company more predictable.  If each partner needs his own attorney, so be it.  Also, be careful about "form" business agreements, as an agreement suitable for one deal may not be appropriate for other deals.  Again, it is sometimes best to have a third party create worst-case scenarios that are not usually the focus of optimistic partners in a new business venture. 
  3. You must have a "go-to" lawyer. All real estate professionals should have a real estate attorney they can call for basic questions. Every project that involves a lawyer does not need to be huge. It's worth the expense to get your attorney on the phone for a few minutes to get a question answered.
  4. When things do turn bad, take a 30,000 foot view. If a real estate deal does start to turn sour, it's best to take a big-picture view of the potential methods to resolve the dispute.  Examples include litigation, mediation or arbitration. In any setting, a strategy should consider long term and short term strategies. Some folks just want to get a lawsuit filed, and while the opposing party may be in "the wrong," the case may not be well suited for summary judgment.  If the case is not a good candidate for summary judgment, it could be a drawn-out and costly battle. There are many real estate deals, especially those with earnest money, that just are not worth engaging in protracted litigation.
  5. You can never do enough due diligence. If you are leasing property, or buying property, the upfront time spent on due diligence will always pay off. If the deal doesn't close because there is a hole in the tenant's history, or the property documents aren't perfect, sometimes its best to lick your wounds and focus on the next deal. 

The best advice is not my own: "Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world."    --Franklin Delano Roosevelt

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