Buying and Selling Commercial Real Estate
Buying and Selling Commercial Real Eestate
Karen G. Shin
This article provides information only, not legal advice. If you have a legal problem or need legal advice, contact us at firstname.lastname@example.org.
Buying commercial real property is generally different from buying residential real property in many ways. First of all, buying commercial real property is generally more complicated than the latter. What we attempt to do in this article is to point out the major areas of concern in commercial real property that may not be of the same significance in a residential transaction.
Unlike residential transactions, the purchase and sale of commercial real property can take more than one form. It can be in the form of a share transaction (i.e. you buy the shares of a holding company that owns the assets) or an asset transaction (you buy the actual property). There are pros and cons to both.
Generally speaking, the price of commercial property will be determined by the amount of income generated by that property. You will hear realtors speak of the “CAP rate” (a.k.a. Capitalization rate). Take caution because while everyone uses the same term, the meaning of that term may vary from person to person. Your “5% cap rate” may not be same as the next person’s “5% cap rate”.
There are exceptions to this general rule. For instance the property may be so unique that the price may be dictated by something other than the rate of return. More importantly, there may be other factors that make the property even with its high cap rate not so desirable.
Due diligence before buying commercial property is also more complicated. Besides the obvious steps of examining the title closely, the lawyer acting for the purchaser will also review all tenancy agreements (or leases) to ensure that there are no outstanding obligations owed by the tenant or the landlord, among others.
If you will obtain financing to fund the purchase, you should keep in mind that this will add time and expense for the purchaser. Commercial lending requirements are generally more rigorous than residential lending requirements. Some of those requirements will cost thousands of dollars before the funding can be confirmed. The purchaser is also liable for the lender’s legal fees as well as the “commitment fees” charged by the lender. If possible, it’s generally a good idea to get an estimate of the lender’s legal fees from the lender ahead of time.
As a last note, it is important to remember that in a commercial deal, everything is heavily negotiated. There is no free lunch. If you ask for something that’s not in the contract, chances are (a) your request will be denied; or (b) your request will be granted in exchange for other consideration. It is vital, therefore, that purchasers seek legal AND accounting advice prior to entering into a contract, not after.
For legal advice related to commercial real estate purchases or sales, please contact us at 604-294-0101 to book a free initial consultation.