§11.2 - Preparing for Closing

• Jurisdiction: Washington

§11.2 PREPARING FOR CLOSING

This section discusses the steps necessary to prepare for a closing.

(1) Due diligence

Due diligence in real estate transactions consists of researching, collecting, reviewing, and analyzing factual and legal information concerning the property and the parties to the transaction. Due diligence includes research to determine the existing condition of the property and whether there are legal or other impediments that make the property unsuitable for the intended use. Research also may be done to determine if issues exist that could impair the ability of a party (particularly a seller or a borrower in a loan transaction) to perform its obligations in connection with the commercial real estate transaction.

Materials to be collected from third parties, reviewed, and analyzed by counsel with respect to the real property may include title reports with copies of recorded documents, surveys, environmental reports, and zoning information. Other due diligence materials, such as soils and structural reports and appraisals, generally are not reviewed by counsel. Zoning letters confirming compliance of the property with local zoning requirements and surveys often require significant lead time. A search of Uniform Commercial Code filings usually is conducted and analyzed by counsel (particularly in connection with real estate transactions related to the sale of an operating company, such as hospitality properties) to determine whether any liens are applicable to the personal property being acquired. A U.C.C. search can be conducted online (see http://www.dol.wa.gov/business/UCC/index.html ) or through a commercial due diligence and research company.

Due diligence concerning parties to a real estate transaction may involve searching for tax and judgment liens and for litigation and bankruptcy filings, all of which could impair or prohibit the party's ability to perform. If a party to a transaction is a legal entity, due diligence may include a review of the formation and authorizing documents for the entity to determine if the transaction is within the scope of the entity's powers and/or requires consents from other owners of interests in the entity. Due diligence also involves obtaining evidence that the entity is in good standing and is authorized to conduct business in its state of formation and in Washington. The parties usually will provide one another with entity and authority documents. Information concerning formation and good standing is available online or by request to the Washington Secretary of State (see http://www.secstate.wa.gov/corps/search.aspx ) and through commercial due diligence and research...