Purchasing commercial property is more complex than buying residential property. It almost always involves a lot more money as well as greater liability for all concerned.
When you buy a home, there are laws that provide some form of consumer protection. When you buy commercial property, the law is essentially neutral, and both parties (purchaser and seller) have equal responsibility. For this reason it is prudent to get professional help when buying or selling commercial property.
If you are thinking of purchasing commercial property in Georgia, it’s a no-brainer to consult a Peachtree City commercial real estate attorney, or an attorney based close to where you live or plan to buy.
But in addition to finding the right property and getting a commercial real estate attorney on your side, there are other factors you need to know and should consider. These include some basic first steps:
- Understanding how the value of commercial property is determined
- Recognizing the negotiation process for commercial property sales
- Realizing what “due diligence” involves
- Identifying aspects of legal liability
- Accepting the risks of losing liquidity
- Following the correct process for commercial real estate closings
Assessing the Value of Commercial Real Estate
Establishing the value of residential property is a lot easier than assessing the value of commercial real estate. When you buy a house you can compare recent selling prices of homes of a similar size in the same or a similar neighborhood. This approach might be possible if the commercial property is a shop or office, but other specialized properties (like a theater, a hospital, or even a bakery) may have nothing comparable in type of size.
The other complicating factor is that commercial property implies an income component that will add value. However it is not always possible to accurately assess continuance or stability of an existing income stream. After all who can ever guarantee that existing customers or clients will continue to support a new owner?
For this reason, more often than not buyers and sellers of commercial real estate choose to have a professional appraiser determine the value of the property.
The Negotiation Process for Commercial Property Sales
Negotiating the purchase of any property can be time consuming and intense. However when purchasing commercial property it can be more involved and fraught with potential pitfalls, which is why it’s so important to negotiate with the help of a Peachtree City commercial real estate attorney.
Unlike the purchase of residential properties, buyers don’t have the potential safety net provided by consumer protection laws, even if the seller fails to disclose latent defects and material flaws! This is where the principle of caveat emptor (buyer beware) comes in. Anyone who is thinking of purchasing commercial property must conduct “due diligence” and do their own inspections and investigations to find out everything possible about the property.
Once the purchaser is totally convinced it’s worth making an offer to purchase, they sign a letter of intent (LOI). This is a vital document that outlines the purchaser’s terms – which is why a Peachtree City commercial real estate attorney, or whichever lawyer is representing you, should draw up the document. The attorney will word the LOI to ensure it won’t be binding if the deal collapses or something goes wrong. He or she will also ensure that a full list of due diligence items (see below) is included in the document.
How Due Diligence Works
Buyers are given a certain time period for due diligence, in which to inspect the property
Usually the first step of due diligence when thinking of purchasing commercial property is to obtain an American Land Title association (ALTA) survey. Basically a title deed, the survey will identify everything on the property including boundary lines, buildings, and easements that enable service companies (including those that supply water, gas and electricity) to access the property.
Other documents that need to be examined include leases, mortgages, certificates of occupancy, utility bills, licenses (if relevant), insurance policies, environmental reports, any risk assessments, fire system inspection reports, parking lot contracts, and if it is a high-rise commercial building, elevator maintenance contracts. It is also important to check whether the property complies with the Americans with Disabilities Act (ADA). Usually it’s best to get an expert in each field to check the documents, for example an attorney to review leases, title deed and so on, and a business valuation specialist who can assess the long-term viability of existing tenants and/or the financial strengths of the existing business.
In addition to checking existing documents, it is also wise to get experts to their own assessments, including:
- A building inspector who can physically inspect the building
- A soil scientist who can check soil types and identify environmental hazards; this is particularly important if you are buying land you plan to build on
- A surveyor who can check the title deeds and/or survey the property to ensure that all boundary and other property lines are identified correctly.
Legal Liability for Commercial Properties
The implications of legal liability make it vital to check that the property doesn’t violate any laws. If it does, the purchaser will assume legal liability with ownership, even if the problem was caused by the actions of a current or previous owner. If a problem is identified, the current owner (seller) must rectify the situation.
An example would be if a soil scientist established there was an environmental hazard on the property; a cleanup could cost more than the property is worth!
Risk of Loss of Liquidity
Commercial property doesn’t come cheap, and commercial real estate transactions can tie up huge amounts of money. If the property is let out to a tenant or tenant this can also impact on liquidity, particularly if they don’t pay on time (or at all), or decide to give notice.
Both short-term and long-term risk must be carefully evaluated before purchasing commercial property to ensure the transaction really does make financial sense. Remember that commercial properties are subject to foreclosure just like residential properties.
Where to Find a Peachtree City Commercial Real Estate Agent
If you are thinking of purchasing commercial property and need someone to guide you through the legal hurdles and possible pitfalls, contact a Peachtree City commercial real estate attorney from Slepian, Schwarz & Landgaard now.