Commercial Real Estate Transactions: Considerations for the Buyer
An Overview of Real Estate Transactions
For many businesses, commercial real estate transactions are among the most time-consuming and resource-intensive tasks they will ever encounter. Real estate transactions are governed by a combination of federal laws, state statutes and common law. The state laws can differ greatly from state to state. Many buyers of commercial property find it helpful to consult an attorney with real estate experience to help ensure that a deal reaches a satisfactory conclusion quickly and smoothly.
The Buyer’s Responsibilities
While not required, lender financing is usually needed to purchase real estate. The lender will perform its own title and survey exams. The property will need to be appraised as well. There may be additional fees if there is assumption of financing.
Deciding the Form of Ownership
Buyers need to decide how they will hold title to the property once it is purchased. In making that decision, buyers should consider the tax implications and protections each type provides against liabilities.
Title reviews are done either by a title abstractor or title company. The review requires searching the land records to determine what items might burden or benefit the property. The reviewer then prepares a title commitment that lists encumbrances, exceptions, and other issues related to the record. Buyers should know what’s in the title commitment, especially the exact parameters of the exceptions. It’s also important that buyers carefully choose the type and extent of title insurance.
In addition to examining the exceptions, buyers should review a survey of the land and its improvements. The survey allows buyers to determine the actual size and location of the property, the location of any easements, and the acceptable scope of use.
Buyers should determine what warranties, if any, the seller has provided, carefully considering the breadth, scope and length of time the representations and warranties cover.
The Study Period
Buyers need to learn everything they can about the property under consideration. Much of this due diligence is done during the "study period."
Zoning, subdivision and land use approvals need to be completed before the purchase is finalized. The requirements will vary depending on the type and characteristics of the property, and the intended and current uses of the property.
Buyers should also check current violations, current agreements affecting the property, and current or proposed fees assessed against the property.
Inspection of the buildings on the property is critical to ensure they were constructed properly for the intended uses of the occupants and the surrounding environment. A current inspection should be done by a certified third-party inspector qualified in the type of property to be inspected.
An environmental site assessment needs to be done to prove to the lender that no environmental contamination is present. Buyers may need to hire environmental engineers or consultants to do the assessment. (It is important the environmental professionals be on the lender’s list of approved auditors.) If the audit concludes hazardous material is present, buyers will have to determine whether it is worth the risk to own such a property. For developed properties, buyers should hire architectural or structural engineers to determine if the improvements are structurally sound.
Review of Leases
If assuming a current lease, buyers must carefully review it, check all related documentation, and interview all tenants about the conditions of the property. Reviewing the leases also helps determine what rights, if any, the tenants have over the property. The end game is to make sure that the buyers are actually buying the exact property the seller claims to be selling.
If you have any real estate questions, do not hesitate to contact one of our experienced attorneys at Garcia & Gurney, ALC.
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