From the paperwork to the payment, dive into the protocols and practices surrounding good faith deposits in NYC’s commercial real estate transactions.
In the fast-paced world of New York City commercial real estate, where deals can be made and broken in the blink of an eye, understanding good faith deposits in NYC is critical for executing deals smoothly and avoiding legal pitfalls.
Commercial investors face many challenges with good faith deposits in NYC, including difficulty in recovering the deposit, loss of capital and potential investment opportunities, and unclear contracts. Many of these challenges likely stem from a lack of understanding of good faith deposits in NYC.
Therefore, in this article, we'll explore what good faith deposit agreements entail, the legality of these deposits, the unique NYC legal landscape that governs them and how it works, and customary norms among real estate players. We cover the following:
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A good faith deposit agreement is a contract that governs the payment, handling, and release of an earnest money deposit during a commercial real estate transaction. These legally binding agreements stipulate:
From Brooklyn to Staten Island, handling deposits for commercial properties is closely regulated in New York City, with deposit agreements tending to protect sellers.
For good faith deposits in NYC, Brett Ari Fischer, Founder of The New York City Broker, says, “The standard deposit amount in NYC when you sign the contract is 10% of the purchase price. For a $1,500,000 property, that would be $150,000. In most cases, you (the buyer) will transfer the deposit into an escrow account held by the seller's attorney.”
Can CRE investors just include earnest money in their offers, or are good faith deposits in NYC illegal?
Since offering a good faith deposit in NYC is not illegal, requesting good faith deposits from commercial buyers is a common practice. However, good faith deposits are not legally binding under NYC law. In fact, these deposits are extremely common for most commercial real estate transactions in the city’s competitive CRE market, often requiring the assistance of real estate agents and brokerage firms.
Still, sellers must follow stringent rules, such as placing deposits into escrow accounts. Additionally, sellers frequently include a “time is of the essence” clause to create strict deposit refund deadlines that buyers must meet.
In short, legally speaking, a buyer is not required to pay a good faith deposit upfront. While good faith deposits in NYC law are not mandatory, volunteering a deposit at the outset remains an option if the buyer genuinely wishes to show good faith. Hence, investors must be well-versed in navigating these decisions.
It's worth mentioning that while real estate brokers play a crucial role in real estate transactions, they don't directly handle the good faith deposit in NYC. Additionally, their broker fee is usually negotiated and paid independently of the deposit.
Despite the common practice of good faith deposits in NYC, it's crucial for investors to understand that many of these norms are simply established customs rather than legal requirements. Motivated sellers frequently deviate from such practices, making it all the more important for buyers to negotiate advantageous terms.
Among credible, experienced sellers and their representatives, it is typical to provide prospective buyers with full details and copies of proposed earnest money deposit (EMD) agreements well in advance. This allows investors ample time to thoroughly review the terms with their legal counsel before making any commitments.
Additionally, many sellers are amenable to a collaborative approach to certain aspects of EMD agreements. This includes mutually agreeing on reputable third-party escrow agents to hold deposits rather than the seller unilaterally appointing a brokerage firm.
The vast majority of EMD contracts include a range of contingencies that allow buyers to terminate the agreement and receive a full refund of their deposit if specified conditions are not met. Common contingencies may include:
However, the specifics and timeframes surrounding these contingencies are still heavily negotiated between parties based on their respective leverage.
Given New York's distinct legal environment, skilled negotiation of EMD agreement terms is paramount for buyers. A few key areas to focus on:
Push for as many contingencies as possible to protect the deposit, such as termination rights if the property has defects, approvals can't be obtained, tenants go dark, financing falls through, etc.
Negotiate against overly limited deadlines and “time is of the essence” language. You need sufficient windows to conduct due diligence, obtain approvals, line up financing, and more.
While sellers often want 10% or more deposits, lower amounts like 5% can potentially be negotiated, especially for larger deals where the absolute dollar value is still substantial.
Ossiana Tepfenhart, Contributor to PropertyNest, says, “Hot housing markets like NYC might see fees as high as 5 to 10 percent. The earnest money deposits tend to be a reflection of the demand people have for that home.”
Are good faith deposits refundable in NYC? Whether or not good faith deposits are refundable in NYC depends on what causes the real estate transaction to be canceled or completed. If the sale closes as planned, the earnest money goes towards the buyer's closing costs. However, if the buyer chooses not to purchase the property for a reason unrelated to the inspection results, the seller keeps the earnest money deposit. On the other hand, if the inspection or appraisal reveals issues that slow the sale, the earnest money should be returned to the buyer.
The bottom line is that no two EMD agreements are alike. Working with seasoned legal advice to strategically negotiate and navigate the nuances of these agreements for your specific deal is critical when investing in New York State commercial real estate.
Beyond legal stipulations in EMD agreements, there are some broader best practices investors should follow for successful execution:
New York courts place comprehensive due diligence burdens on buyers before deposit deadlines. Exhaustive investigations of financials, approvals, property conditions, tenants, and more are vital.
Supply all requested documentation promptly, confirm all written communications, and establish coherent paper trails to protect deposit refund rights if disagreements arise.
For condo/co-op purchases requiring board approval, carefully review stipulations addressing potential rejections/delays and how they impact deposits.
Conduct research, credit checks, and background checks on sellers, their brokers, and all parties involved. Past disputes, lawsuits, bad credit scores, a reputation for bad faith dealings, or even scams can signal major EMD risks.
Commercial real estate investors often struggle with tying up substantial capital in earnest money deposits. An innovative financing solution has emerged to address the challenges they face. This situation arises across multiple potential deals.
Online firms such as Duckfund can help you with soft deposit funding. Duckfund is a real estate financing platform that specializes in providing soft deposit financing for commercial real estate (CRE) investors.
Soft deposit financing essentially provides the upfront deposit money required by sellers, allowing investors to go under contract and secure properties with just their signature initially.
If the investor decides not to purchase that particular property for any reason, they simply walk away without being out-of-pocket for the deposit. However, if they wish to move forward and close, they pay the funding firm an amount equal to the deposit to take over the purchase contract.
Innovative solutions like soft deposit funding can prove invaluable for active commercial investors frequently seeking properties in competitive markets like New York City. They empower investors to be agile bidders without overextending themselves financially until the ideal acquisition opportunity arises.
While executing a commercial real estate deal in NYC is never easy, properly navigating the unique challenges surrounding good faith deposits in NYC can ultimately make or break high-stakes transactions. Investors willing to do their due diligence can prevail in this demanding landscape.
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