A.CRE

Purchase and Sale Agreement

A legally binding contract between a buyer and seller that outlines the terms and conditions of selling a property.

Putting ‘Purchase and Sale Agreement’ in Context

Background

Sierra Equity Partners, a real estate private equity firm, is in the process of acquiring a 150-unit, market-rate multifamily apartment community called Riverwood Apartments in Sacramento, California. The acquisition is classified as a Core-Plus investment because the property is located in a desirable submarket and has stable cash flow, but it requires minor capital improvements to optimize its operational efficiency.

The Role of the Purchase and Sale Agreement (PSA)

After initial negotiations on purchase price, key terms, and the overall structure of the deal, Sierra Equity Partners and the seller of Riverwood Apartments enter into a legally binding Purchase and Sale Agreement (PSA). The PSA serves as the governing contract for the transaction, outlining the terms and conditions for the sale of the property. It clearly defines the rights, obligations, and remedies available to both the buyer and the seller.

Key Provisions of the PSA

The Purchase and Sale Agreement for Riverwood Apartments contains several key provisions that protect both the buyer (Sierra Equity Partners) and the seller. Some of the most critical provisions include:

  • Purchase Price: The purchase price is set at $32,000,000, with a $1,000,000 earnest money deposit required within three business days of signing the PSA.
  • Due Diligence Period: Sierra Equity Partners is granted a 30-day due diligence period to inspect the property, review financial statements, and evaluate key reports, such as the Property Condition Report (PCR) and the Phase I Environmental Assessment.
  • Contingencies: The PSA includes several buyer contingencies, allowing Sierra Equity Partners to terminate the contract and receive a full refund of its deposit if significant issues are identified during the due diligence period. Common contingencies include:
    • Unfavorable findings in the Property Condition Report (PCR)
    • Unresolved title issues or zoning non-compliance
    • Failure of the seller to deliver required documentation, such as tenant leases, rent rolls, and financials
  • Representations and Warranties: The seller is required to make certain representations and warranties regarding the property’s condition, ownership, and legal status. For example, the seller warrants that there are no known undisclosed environmental hazards on the property.
  • Closing Conditions: The PSA specifies the conditions that must be met for the transaction to close, including delivery of clear title, transfer of all tenant leases, and the seller’s compliance with all required repairs as agreed during the due diligence period.
  • Remedies for Default: The PSA outlines remedies in the event either party defaults. For example, if the seller defaults, Sierra Equity Partners may sue for specific performance or receive its deposit back. If Sierra Equity Partners defaults, the seller may retain the earnest money deposit as liquidated damages.

Negotiation and Revisions to the PSA

During the due diligence period, Sierra Equity Partners identifies several issues as part of the Property Condition Report (PCR), including the need for $198,000 in repairs for the roof, HVAC systems, and ADA compliance. To address these findings, Sierra Equity Partners negotiates an amendment to the PSA. The negotiated changes include:

  • A seller credit of $150,000 applied at closing to offset a portion of the identified repair costs.
  • A provision allowing the buyer to hold an additional $25,000 escrow holdback to cover any additional ADA compliance issues that arise after closing.

These amendments are formally incorporated into the PSA through a written amendment signed by both the buyer and the seller. This process illustrates the flexibility of a PSA and the importance of having clear, enforceable terms that can be modified through mutual agreement.

Conclusion

The Purchase and Sale Agreement (PSA) is a foundational document in real estate transactions, defining the rules, obligations, and key terms of the deal. For Sierra Equity Partners’ acquisition of Riverwood Apartments, the PSA established a clear process for due diligence, set remedies in case of default, and provided the legal framework for negotiating seller credits after discovery of property deficiencies. By clearly outlining the rights and responsibilities of both buyer and seller, the PSA reduces the risk of misunderstandings and provides a pathway for dispute resolution, helping to ensure a smooth transaction from contract signing to closing.

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