Earnest Deposit Strategy Protects Real Estate Deal from Costly Default in Market Down-Turn
SITUATION: Our client was in the process of developing a 48-story mixed-use high-rise building near downtown Chicago with retail on the first two floors and apartments above. While the project was still being constructed, a condominium developer approached our client to purchase and convert the residential units. With a gratuitous offer on the table, it was clear that our attorneys would need to put legal protections in place for the client should the condominium market slow, leaving the converter unable to close the transaction.
STRATEGY: While our client was obligated to finish construction, the condominium converter was permitted to sell units subject to completion. Lawrence Kamin attorneys developed and negotiated an agreement in which our client would retain ownership of the retail portion post-closing, and its institutional investor would receive a majority of the benefits from the residential sale. The key component to achieve our goal and secure our client from a possible defaulting buyer was the deposit of an extreme amount of non-refundable earnest money by the condominium company. Our legal strategy was to ensure the condominium developer had so much money at stake that it could not afford to default—or if a default occurred, the earnest money would be enough to recover the reputation of the building and allow its success as a rental project.
RESULT: As a result of our strategy, the transaction ultimately closed during an extremely slow period for condominium converters. Our client continues to hold the successful retail portion of the project today.