Buying Commercial Real Estate

Rather than leasing, business owners may wish to buy commercial real estate as a place of operation for their companies or for investment purposes. It can be any commercial space, such as an office, store, warehouse, restaurant, or other. Prospective buyers should determine, considering their resources, the type of business, and probability of future profits, whether it is better to buy or lease a space for the commercial activities. The main advantage of buying real estate is obvious - it becomes an asset of the company or of the individual investor. Real estate owners are free to exploit their properties, observing national and local laws and regulations, but being totally independent of any private third party demands (e.g. restrictions imposed by a landlord). Choosing and buying commercial real estate substantially differs from buying a residential property. There is much to be considered in identifying a suitable property and before making a purchase offer.


Interests Transfer: When buying commercial real estate, the buyer may want to purchase not only a particular space, but also to have other interests transferred from the seller. For example, if there are tenants on the property, a prospective buyer may want to have leases assigned to him or her, entitling the buyer to continue rent collection from the existing tenants rather than looking for new occupants. Another example is the transfer of certain licenses that allow the buyer to continue using the property in its present capacity.


Number of Participants: There may be more parties involved than the buyer and a seller. If the property is leased, the rights of the tenants should be considered, particularly 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 lienholders? Is it possible to satisfy them before closing? If a seller has mortgage on the property, there may be several mortgagors; in this case, it is necessary to obtain an agreement from each of them prior to 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.


Property Ownership: The property may be owned by an individual, private company, non-for-profit corporation, or any other legal entity. The identity and type of the property owner can affect the transaction in terms of taxation and liability. If a property owner is not a U.S. taxpayer, this will also affect the transaction. 


Property Value: The value of the commercial property is not only in its purchase price, but also in the amount of prospective income it might generate over time. Accordingly, it is very important to make sure that the property can be used for conducting regular business activities. Buyers should consider insurance policies not only against risk of loss due to natural disasters or other casualties, but also against the loss of income due to business interruption or against liability that may arise from property use by the licensees or invitees.


Compliance with Securities Laws:If the interests in real estate at issue may be offered to general public for the investment opportunities, such transactions fall under the Securities and Exchange Commission (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 protect safety and health of general public and environment.


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 all ADA standards. 


Due Diligence: Prior to signing a contract of sale, the buyer must perform certain due diligence to verify 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, albeit not all. It is the buyer’s responsibility to conduct all necessary investigations before purchasing any property, particularly the following:


1.      The first main item is the title to the property. The buyer’s attorney should perform title search to ensure that the seller is the true and legal owner of the property and that his or her ownership, interests, and the right to transfer the property is not restricted by the interests of any third parties.


2.      The buyer should ensure that the seller transfers exactly what was agreed upon. The parties may want either to use the recent survey of the property or order a new survey if it is outdated. A licensed land surveyor should visit the property and will draw a map of the land, indicating the exact boundaries of the land being conveyed, who owns the adjacent parcels of the land from all sides, whether there are easements and covenants attached to the land, and, if they are, which portions of the land are affected by them, as well as various other information needed to precisely identify the property being transferred.


3.      The buyer’s attorney should obtain proof that all charges payable in connection with the property (which can become liens against the property if unpaid), are satisfied by the seller.


4.      The buyer’s attorney should check existing and potential zoning regulations to make sure the buyer will be able to use the property as intended. Zoning regulations are imposed by the local government and list the purposes for which the land may be used (e.g. exclusively residential area, commercial area, or a combination of these). If current zoning code does not permit the buyer to use the property as desired, the parties may agree to apply to the local zoning authority to obtain approval for the proposed use as a condition of the sale. Failure to understand zoning codes may be very costly to the buyer, as it may prevent intended use of the property after the purchase. Zoning requirements also significantly affect the marketability of the property.


5.      The buyer should make inquiries whether the property is located within a historic preservation district. In some areas, the rights of the owners to change the façade of the building are limited by the enacted legislation that aims to preserve the architectural heritage. This may be a concern for an owner who wants to remodel the building to a more modern look; in this case, the new owner needs to obtain an approval from the Landmarks Preservation Commission before making any changes.


6.      The buyer may want to retain an engineer or architect to examine the property for physical problems. Often serious physical problems may not be evident to the casual observer. These can include problems with the roof, foundation, supporting structures, utility systems, and architectural defects. In addition, the buyer may wish to perform environmental examinations of the grounds and structures to exclude the possibility of toxic substances being released or stored on the premises. 


When all due diligence matters are completed and the parties have 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, drafted and negotiated by attorneys for the respective parties. Various terms may be negotiated in connection with the purchase of real estate. The partial example of negotiable items are purchase price, down payment, 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 so on. 


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 closing. If the buyer does not have any other means to buy a property other 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 financing on the prevalent terms.  If the seller has mortgage against the property, he or she must make arrangements with his or her existing mortgagor to have the 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 attorneys, and other interested participants meet to transfer the title of the property from the seller to the buyer. The seller delivers the deed and keys 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 a 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 begin exploring the property and enjoying his or her new possession.

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