Buying & Selling Commercial Real Estate: Some Practical Tips

More and more business owners are deciding that purchasing a building for their business use is a better option than leasing space.  While real estate prices are currently at a high level, there has been a renewed confidence in the strength of the real estate market in general. 

Once you have decided on a parcel of commercial property you are interested in buying, it is absolutely imperative that an environmental assessment be done and a professional engineer be engaged to inspect the building.  Ideally, these assessments should be done prior to contract, but the seller will typically insist on having a signed contract beforehand.  At a minimum, the contract of sale should provide the purchaser with a reasonable due diligence period, during which environmental and other assessments can be made.  Additionally, the purchaser should have the unqualified option to terminate the contract in the event these assessments uncover problems.  In the event unfavorable conditions are detected, you will at least be in a good position to negotiate a lower price if you should decide to proceed with the deal.  

It is likely that the purchaser of commercial real estate will find it necessary or desirable to finance the deal with a mortgage loan. It is important for the buyer’s attorney to negotiate a liberal mortgage contingency clause, so that if the loan application is not approved, you can get out of the deal without losing your contract deposit.  It is generally advisable to form a new corporation or limited liability company to take title to the commercial property, one which is separate from your operating company.  In the event someone is injured on your property, it is desirable to limit your liability to the value of the property and not subject the value of the business to any loss.

The seller of commercial real estate may wish to consider utilizing a 1031 exchange, in order to defer capital gains.  In order to defer the gains, you must purchase a like-kind piece of property within a limited period of time.  You need to employ the services of a 1031 intermediary in order to accomplish this objective.  

Even if you are not interested in purchasing commercial real estate for use in a business, you may wish to use the real estate as an investment vehicle.  In these instances, it is still imperative that the appropriate inspections and assessments be made.  Whether purchasing commercial property for use in your business or as an investment, one should retain experienced counsel in order to negotiate the real estate contract and provide guidance in due diligence matters.

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