Commercial real estate transactions are an aspect of business that most companies will eventually need to consider. While brick and mortar operations must find and secure a commercial property from day one, even online businesses will eventually need to consider physical space as they scale. For instance, an online retailer may be able to run its business out of their garage for a time, but as sales volume grows the need for a warehouse or more commercially oriented space may become a necessity. As your business grows and changes, you will have an array of legal considerations and decisions including the potentially complex interplay between your personal finances, business entity, and commercial property. A deft handling of these interrelated concerns can help your business grow and realize its potential. Mistakes, including the acceptance of an onerous commercial real estate contract or purchasing or leasing space that is inadequate or ill-suited for the company’s needs, can constrain growth.
William Heyman can answer your legal questions and concerns regarding commercial real estate. The Baltimore-based Heyman Law Office can help established businesses and entrepreneurial start-ups navigate the complex legal aspects of commercial real estate transactions. While the following is general in nature and cannot serve as legal advice, Mr. Hey man has prepared brief answers that address some of the basic concerns in a commercial real estate transaction. This FAQ should serve as a starting point for your inquiry. If you would like to discuss the particularities of a particular commercial real estate transaction, call the Heyman Law Office at (410) 305-9287 or contact us online.
What Is Commercial Real Estate?
While this is a seemingly fundamental question, it is a good starting point for an inquiry into some aspects of commercial real estate transactions. A commercial real estate transaction involves property that is intended to be used for commercial purposes. In general, this means that purchaser is seeking land that can be used for retail, industrial, office, or agricultural purposes. In some instances, such as a for an apartment building or a property management company, the building may even be residential.
This raises an important initial consideration. That is, since the purpose is for commercial use, the land should be zoned so that it is suited for the uses you are considering. Furthermore, one should ensure that surrounding land is not zoned in such a way that would constrain or otherwise frustrate your intended use.
What Makes Commercial Real Estate Transactions More Risky than Consumer Purchases?
As a commercial purchaser or lessee, the law generally considers you to be significantly more sophisticated than the average consumer. This means that you will not receive the same protections that a consumer would. Mistakes in the negotiating or drafting process can subject a business to substantial potential liabilities. For instance, your rent may fluctuate under the terms of the lease agreement. The amount of change may be fixed or pegged to certain market factors. The failure to understand and anticipate these terms may result in a substantial increase in operating expenses. Alternatively, the terms of a commercial lease agreement may seek to make your business liable for repairs and improvements to the space. You should remain aware of these and other potential pitfalls.
What Does it Mean if I Purchase Property “As-Is?”
Purchasing property “as is” means that the property is being offered contingent to the understanding that the property comes without warranty. Typically this is a good indication that the property has at least some issues that will require work or repair. However, for certain defects and conditions, the law may compel disclosure.
What is “Clear Title” and How Can it Effect my Commercial Real Estate Transaction?
Clear title essentially means that title or claim to the property is free from any other competing claims or encumbrances. Every real estate transaction should be preceded by a search for defects in title. Defects in the title are more common than one may conceptualize simply because people make mistakes. Deeds may not be recorded or they may be recorded incorrectly. In other instances, previous owners may transfer partial interests in the property or easements may not be recorded.
If the title is not “clear” and free from encumbrances, liens, or other claims the buyer of the property risks litigation concerning these claims. The third party holding the claim against the property may decide to file a lawsuit against the new owner where they seek partial ownership or control, financial compensation, or enforcement of a certain right over the land.
How Do I Know that I am Getting “Clear Title?”
There are a number of steps involved in ensuring that any commercial title you would take in a commercial real estate transaction is “clear.” However, generally speaking, a commercial real estate transaction attorney or title company representative would research public records. Typically, a title report will be issued containing opinions regarding the condition of the title to the commercial parcel.
Am I legally Required to use an Escrow?
There is typically no legal requirement that compels the use of escrow, but there may be many advantages in using an intermediary. In many cases, use of escrow can mitigate risk for both the buyer and the seller. However, escrow instructions alone should never be considered sufficient to close a commercial real estate transaction. Parties should have a full purchase contract, in writing, in place before the deal closes.
Does it Matter How I Take Ownership of Commercial Property?
The method by which you take ownership of commercial property or enter into a commercial lease is extremely important. Before purchasing commercial property or engaging in a commercial lease it is prudent to assess whether your business entity serves both your business and personal needs. If your company is still operating as a sole proprietorship or has elected a form of organization that does not distinguish personal and business asset and liabilities, this could create serious problems and complications should the business run into hard times or if the company is on the hook for expensive repairs due to defects at the site. Or, if you choose to purchase a single purpose entity that owns a property rather than the property itself, you will be taking on potential liabilities that must be carefully scrutinized with appropriate due diligence before closing on the transaction.
How Can I 1031 Exchange Benefit a Seller of Commercial Real Estate?
If you’ve heard of the term 1031 exchange before, the person was likely referring to internal Revenue Code Section 1031. IRC Section 1031 can permit a seller of commercial property to defer the tax impact of the sale of commercial property. However, this benefit can only be claimed when the proceeds of the sale are used to reinvest in similar property. Before attempting to claim the tax benefit of a 1031 exchange, one should ensure that the transaction complies with all legal requirements imposed by IRC § 1031.
What is the Difference between a Real Estate Broker and a Real Estate Attorney?
A real estate broker is a professional, but he or she is not necessarily an attorney. This often means that the focus of a lawyer and a broker will differ substantially. On one hand, the broker is focused on negotiating and expediting the transaction. They are also, traditionally, only compensated when the sale closes. This means that they are motivated to push a deal forward and some will not concern themselves with possible issues or problems related to the terms of the contract that will not become an issue until after closing. On the other hand, a lawyer thinks about the minute details of the contract and how certain terms and aspects of the contract can result in issues and problems. Legal review of the contract for potential problems and issues may seem like a time-consuming additional step, but preventing problems is typically extremely cost-effective.
Work with an Experienced Commercial Real Estate Lawyer in Baltimore
Whether your business is seeking to enter into a commercial lease or to purchase or sell commercial property, legal guidance and review are essential. The above FAQ introduces some of the basic concerns involving commercial real estate transactions, however, concerns are often significantly more complex. Furthermore, the FAQ presented above is generalized in nature and is not responsive to the particular terms, clauses, and other aspects that would impact a real estate transaction.
If you are seeking legal guidance for a commercial real estate transaction attorney Bill Heyman can provide meticulous and strategic guidance. He can review the transaction itself and the legal concerns surrounding and related to the transaction. If your business is seeking guidance, contact the Heyman Law Office today by calling (410) 305-9287 to schedule a confidential consultation.