There are two types of properties which incompasses all the types of properties for purchase and sale - the “real property” and the “personal property”.
Real properties are those that are immovable - land and its improvements.
Personal properties are anything that is movable, which includes mobile homes (also known as manufactured homes), personal belongings, businesses, licenses, merchandise, etc.
REAL PROPERTY SALES
Real Properties sale can be further categorized into different types of real properties and then subcategorized thereafter:
Single Family Residence
The Single Family Residence or “SFR” is by far the highest percentage of type of property that is being purchased/sold. Basically they are a one-unit stand alone dwelling that is used as a residence. Owners can do whatever they want to the structure and the property itself, within established city or county guidelines.
A Condominium (Condo) is also an SFR used as a residence, but may be attached to other units, under one roof, sharing walls. Condominiums are built as part of a condominium project and has a homeowner association (HOA) that manages common areas. Ownership of this type of property is limited to the space within the four walls of the unit and under its the roof. Owners do own an undivided interest in the common area and pay association dues for the privilege of using the area. Common areas are those areas outside of the living area and include walkways, parking lots, outside recreational areas.There are guidelines which limit what physical changes the owner can make to the exterior even including the color of exterior walls.
A Planned Unit Development (PUD) is a cross between an SFR and a Condo. It is a one-unit stand alone residential dwelling which is part of a planned development and has a homeowner association which manages common areas. Ownership is the actual unit building as well as an interest in common area. Association dues are charged for the maintenance of the common areas. Like Condos there are guidelines which limit what physical changes the owner can make to the exterior, including the color of paint of exterior walls.
An Apartment is a residence that is part of a building complex under one roof which is leased/rented out and not owned by the resident.
In the sale of apartment units there is a proration of rents and security deposits collected on occupied units between Buyer and Seller at the close of the transaction.
As a matter of record, there are complexes which start out as apartment units and then converted to condominiums. Once the process is approved and completed the individual units become eligible for sale for individual ownership.
Standard commercial property are those that are zoned by the local government agency for commercial use only. These are properties wherein businesses operate.
Rental of commercial properties are usually on a long term lease basis. The lease could include a monthly rent amount plus building insurance, maintenance and real property taxes (what we term as a “triple net” lease). Utilities are normally also paid by the tenant for their unit.
Leases are prorated between Buyer and Seller at the transfer of ownership.
Like the residential condo, a commercial condominium is also part of a bigger condominium project and have the same standards and guidelines as residential condominiums, with the exception that its use is commercial and not residential. An Owners Association for the maintenance and care of common areas is also part of the project.
The rental and sale of commercial condominiums follow the same guidelines as the standard commercial properties, with the same lease prorations, plus the Owners Association dues proration.
Shopping Centers are commercial units which are not owned individually but part of a larger project. Like apartment units the individual units are leased. Like commercial properties, the leases are usually long term and triple net based on the percentage of unit size to the whole complex.
Although not “commercial” in nature, settlement agents consider hotels and motels commercial properties, even though its primary purpose is for rental as short time residences.
Like apartments, hotels and motels are also single unit residences within a building complex. Unlike apartments, the rental of these units are usually short term and the units may not include the full array of rooms and extensive kitchen facilities found in apartments.
There will be a proration of rents collected as of the day of transfer of ownership.
The simplified (and popular) name for vacant land is “dirt”, as that best fits the description of real property with no improvements on it. Of course, this is a simplification as there may be some sort of structure on it that has no value and is going to be torn down, and there may be trees and scrub which will also be removed.
The purchase of vacant land is normally made with the intent of future development and as such, it could be much more complicated for a potential Buyer than a transaction for the purchase of an existing residential or commercial property. An experienced developer will require time to do his “due diligence” - the research of the land, government regulations and requirements, existing easements, which will affect his ability to build. Although there will not be much that the Escrow Holder can help in this due diligence, there are a few things that they should be ready to order from the insuring title company: copies of all the underlying easement documents and a map of easements plotted and color coded.
Due to the factors above the time period for a transaction for a vacant land might be lengthy.
New Construction and Subdivision
After the vacant land purchase comes the subdivision of the land into separate tracts and/or lots and the finalization of new construction. Although the Escrow Officer is not involved in the process of subdivision and construction, once the finalized improvements are completed and scheduled for sale, the Escrow Officer will be a part of units’ “first sale out” if the project is a subdivision of tract homes or condominium units in a complex. The developer/Seller will designate one Escrow Company to handle the sale out of all the units.
PERSONAL PROPERTY SALES
There are many types of personal property that can be sold, and different laws, rules and regulations that govern each. The most prevalent are the following:
BUSINESS OPPORTUNITY SALES
The sale of a business opportunity is also called a “Bulk Sale” in the California escrow industry and it characterizes the sale of an ongoing business. It is a specialized type of transaction and is governed under special government codes in California - the Uniform Commercial Code and/or the Business and Professions Code. Differences in the handling of the real property sale versus the personal property Bulk Sale is two fold - there is no title insurance policy that is purchased for the benefit of the Buyer, and a Grant Deed is not the document conveying ownership.
It is important to note that in many cases the sale of the business can be separated from the sale of the real property on which it is located . Sometimes it is a package deal and depending on the parties involved, it can be handled as one transaction or separated into two - one for the sale of the real property and one for the sale of the business located on it.
Here are some salient points to the handling of a business opportunity transfer:
- A Bulk Sale transaction calls for a Uniform Commercial Code search with the Secretary of State and a search at the County Recorder’s office for liens filed in those agencies.
- It calls for a publication in newspapers in the judicial district of the business, giving the their creditors/vendors notification and sufficient time to submit their claims for payment.
- It calls for the Escrow Holder to contact and receive a Certificate of Release from government agencies of Seller’s employment tax liabilities.
- The sale can include the tangible assets (inventory, fixtures and equipment, client lists) as well as intangible assets (goodwill) and a breakdown is normally required.
- As the businesses may occupy a location that is rented or leased, it calls for the Buyer to first seek Landlord approval as the new tenant.
- The transfer of business ownership is evidenced by the delivery of a Bill of Sale.
The types of businesses that are sold can be as varied as whatever stores you see down a street of commercial businesses. They run the gamut of doughnut shops, coffee shops, nail or hair salons, liquor stores, restaurants, hotels/motels, auto repair shops, gas stations, and auto dealerships, to name a few. Every business that exists can be sold and purchased. There are regulatory and processing differences so these transactions should go through a third-neutral party (Escrow Holder) who is sufficiently experienced to handle the transaction of its type.
Whether a small mom-and-pop shop or a large restaurant with many seatings the importance of going through an escrow is in the publication of the Notice to Creditors, which by statute gives the Seller’s creditors/vendors the opportunity to submit their claims for payment and thus relieve the Buyer of any demands from these creditors after they assume the business.
If the restaurant has a liquor license then the transaction must go through an Escrow Holder and specific instructions followed. The transaction cannot close until the Buyer is approved for the transfer of the liquor license through California’s Department of Alcohol and Beverage Control (ABC).
As mentioned previously, the sale of the business can be separated from the real property on which the business stands and this is very evident in the sale of hotels. There may be a few components to this sale, the sale of the real property - in which case the laws governing the sale of real property apply; the sale of the actual hotel business - in which case the Bulk Sale laws apply.
Another component is the disposition of any other businesses that operate within the hotel, for instance, restaurants and other shops. If they are separate and owned or operated by others, then they are considered tenants and proration of leases and security will be involved.
If these other businesses are under the same management and their sale are included in the total sales price then there is a possible further breakdown of the individual cost for each separate business.
If any of these businesses include a liquor license, there is an additional concern for the transfer of this license (see Liquor License transfers).
The sale of car dealerships is normally a complicated transaction for the Buyer and Seller and requires an extended period of due diligence wherein the Buyer will examine all of the Seller’s books, records, financials and importantly, obtaining approval of the sale by the national auto brand corporation.
Gas station sales may have two components, the gas station itself and a separate auto repair section, which may be under separate ownership. For the gas station, brand sale approval must be obtained from the company for which gas brand is contracted to be sold. If the auto repair component is not included in the sale then that business could be treated as a tenant of the owner of the gas station, depending on the contractual agreements between them.
Another consideration for gas stations purchasers is whether there is any ground contamination from underground facilities which will then require a Phase I, Phase II or even a Phase III survey done and/or remediation.
Convenience/Liquor and Other Stores
Businesses which sell goods for retail purposes requires a Seller’s permit issued by the California Department of Tax and Fee Administration (CDTFA). A certain percentage of sales tax is charged to non-perishable goods depending on the location of the store. It is important that the Escrow Holder hold all the funds due the Seller at closing until that Certificate of Release is received from CDTFA, which releases the Buyer of the Seller’s sales tax obligations.
A count of inventory remaining may be a part of the contract if the cost of inventory is separate from the sale price for the business.
In the case of liquor stores, Buyer must obtain approval of the liquor license transfer from California’s Department of Alcohol and Beverage Control (ABC) before the sale can be consummated.
Other Service Businesses
Service business that are sold include, for instance, dental offices, optometry, and other types of medical offices, pre-schools and educational services, even escrow companies. The main component being sold, is the goodwill - the name and reputation of the business which attracts the clients - and its list of existing customers.
Service business, unless they sell some type of product, does not have a Seller’s permit issued by the CDTFA or pay sales tax, so a Certificate of Release from this government agency is not required, but the Releases from the Employment Development Department (EDD) and Franchise Tax Board (FTB) is necessary for assurance that the Seller has paid all his employer taxes.
OTHER PERSONAL PROPERTY SALES
An escrow can be held for the sale of other personal property which may have licenses which get transferred. Examples of these are: liquor licenses, automobiles, planes, boats, mobile homes. Here are the two most common:
Liquor License Transfers
In California the sale/transfer of a liquor license requires an Escrow Holder to act as the neutral third party under the regulations found in the Business and Professions Code. Due to the nature of the product to be sold - liquor - the laws are very specific as to who is approved to hold the license. The Department of Alcoholic and Beverage Control (ABC) holds a very firm hand in interpreting the Code.
An important fact of this type of transaction is that the parties and Escrow Holder have to understand that no funds can be passed between Buyer to Seller before the license is transferred, nor can a Buyer take over the business which has such a license unless they have obtained a temporary license from ABC.
This is the only license in California which is regulated by statute that an Escrow Holder has to be involved in the transfer/sale.
Manufactured Homes aka Mobile Homes
Manufactured homes, commonly known as mobile homes, are homes that are constructed and assembled and shipped to a location of choice. They can be sold new and shipped or an existing one sold at its present location.
There are two types of manufactured homes and the way the transfer is handled is different. The difference is not in the type of construction of the home but whether it is permanently attached to the ground. When the manufactured home is attached permanently to the ground then it becomes part of real property, will show on the property tax rolls and the transaction is handled as a real property transfer.
If the manufactured home is not attached with a permanent foundation it is then considered personal property because in theory it can be removed and put in another location. This home does not appear on the property tax roll but has a Department Motor Vehicles (DMV) license and pays an annual fee to the DMV instead of the County Tax Collector’s office. The paperwork for the transfer of this vehicle will be through the Housing and Community Development (HCD) agency.
In either case, if the property is located in a mobile home park, it is important that the Buyer obtains the approval of the park for the transfer and pays the assessments and transfer fees as required.