The business owners may wish to buy commercial real estate as a place of operations for their businesses or for the investment purposes. It can be any commercial space – an office, store, warehouse, restaurant and many others. The business owners should determine, considering their resources, type of business,
and probability of future profits, whether it is better to buy or lease a space, which they are going to use for the commercial activities. The main advantage of buying real estate is obvious – it becomes an asset of the company or of the individual and its owners are free to exploit it observing the national and local laws and regulations, but being totally independent of any private third party’s demands (e.g. a landlord). Choosing and buying commercial real estate, however, substantially differs from buying a residential property. There is a list of aspects that should be considered before identifying a suitable property to buy and definitely must be determined with exactness before making a purchase offer.
1. The interests transferred
When buying commercial real estate a buyer may want to purchase not only a particular space, but to have other interests transferred to him from a seller as well. For example, if there are tenants on the property, a prospective buyer may want to have leases assigned to him, so he will be able to continue collecting rent from the existing tenants rather then looking for new occupants. Another example is the transfer of certain licenses, which allow continuing the use of the property in its present capacity.
2. Number of the participants
There may be more parties involved than a buyer and a seller. If the property is leased, the rights of the tenants should be considered – whether it is possible to revoke or make changes to their leases. If the seller has liens against the property what are the rights and interests of the lienors and whether it is possible to satisfy them before the closing. If a seller has mortgage on the property, there may be several mortgagors and it is necessary to obtain the agreement of each of them prior to the closing. The negotiations with all parties who may have some interest in the real property may be extensive, but it is vitally important to find out their positions before proceeding with the transaction.
3. Identity of the property owner
The property may be owned by an individual, private company, non-for-profit corporation, and any other legal entity. The identity and type of the property owner can affect the transaction in terms of taxation and liability for the property. If a property owner is not a U.S. taxpayer, the transaction will be affected as well.
4. Value of the property
The value of the commercial property is not only in its purchase price, but also in the amount of prospective income it may generate. Accordingly, it is very important to ensure that the property can be used for conducting business activities regularly. The buyers may consider buying insurance policies not only against risk of loss due to natural disasters or other casualties, but also against the loss of income due to the business interruption or against the liability arising out of the property use by the licensees or invitees.
5. Compliance with government requirements
Securities Laws. If the interests in the real estate at issue may be offered to general public for the investment opportunities, such transactions fall under the Securities and Exchange Commission (the SEC) regulation and require certain public disclosures.
Federal, state and local health, safety and environmental regulations. Commercial properties are subject to various regulations intended to assure that safety and health of general public is not jeopardized and the environment is preserved.
Americans with Disabilities Act (ADA) Compliance. The buyer must inquire about past renovations and determine whether the building is subject to the Act and meets the ADA standards.
6. Due diligence
Prior to signing a contract of sale, the buyer must perform certain due diligence to determine whether the property is suitable for use and in compliance with the seller’s representations or lack of such. The seller has an obligation to disclose some conditions, but not everything. It is the buyer’s responsibility to conduct all necessary investigations before purchasing the property. The proper due diligence procedure will be reviewed in the next post.
When all due diligence matters are completed and the parties have the necessary information about each other and the property to be transferred, they can begin negotiations of the contract of sale. Contracts for the purchase of commercial properties are often very lengthy and complex documents, which are drafted and negotiated by the attorneys for the respective parties. There are multiple terms that may be negotiated in connection with the purchase of real estate. The partial example of negotiable items are purchase price, downpayment, mortgage, personal property included in the price of the real property, repairs to be made before the closing date, risk of loss, the rights of the existing tenants if any, damages in case any of the parties fails to promptly proceed with the transaction, and many others.
If the buyer needs financing to make a purchase, then the buyer must apply for and obtain a commitment letter from his prospective lender before the closing. If the buyer does not have any other means to buy a property rather than a loan, the contract of sale must be contingent on the buyer’s ability to obtain such financing. After signing the contract of sale and before the closing, the buyer must make good faith diligent efforts to obtain the financing on the prevalent terms. If the seller has mortgage against the property he must make arrangements with his existing mortgagor to have his mortgage satisfied (or assigned to the buyer) on the date of the closing. Many financial institutions make the satisfaction of the mortgage a condition precedent to selling the property.
The closing date is when all pre-closing conditions are satisfied and parties, their attorney and other interested parties meet to transfer the title of the property from the seller to the buyer. The seller delivers the deed and keys for the property to the buyer, the buyer pays the balance of the purchase price to the seller, the representative of the title company issues a new title insurance policy on the buyer’s name assuring the buyer that proper title is being delivered and the real estate brokers are paid their commissions if they assisted with the transaction. If the seller has mortgage on the property or the buyer is going to obtain financing the representatives of the lending institutions will also be present. After the parties exchange all necessary documents and sign transfer taxes forms the new owner can start exploring the property and enjoy his new possession.