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Commercial real estate transactions are typically more complex than residential transactions. Usually, they involve large sums of money and increased liability for both parties. Unlike a residential transaction where the law provides basic consumer protection for the buyer, the law takes a neutral approach to its treatment of commercial transactions.
Courts expect that both parties to commercial real estate transactions are sophisticated enough to understand the contract terms. Therefore, they will hold the parties to the terms of any sales agreement – absent illegality or fraud. For these reasons and others, a buyer and seller of commercial real estate should both have professional help closing the deal.
A large part of buying and selling commercial real estate is the process of determining a value for the property. By nature, real estate is a unique product that may have no exact sales comparison. For example, a buyer may be looking to purchase a movie theater in an area where there is no other theater that has sold to establish a market for the property.
Further, commercial property often has an income component that adds to the value of the property. Commercial property typically has a current and future income stream that must be factored in to the sales price. Buyers and sellers will hire a professional valuation expert to set a price for the property.
Sales Negotiation and Due Diligence
Buying and selling commercial real estate is typically subject to intense negotiation. Commercial buyers cannot fall back on consumer protection laws if an aspect of the deal ends up not being fair. Buyers are expected to conduct due diligence. In other words, they must investigate the transaction thoroughly before making a decision.
During the sales negotiation, the buyer has leeway to determine facts that impact the value of the property and attempt to gain concessions from the seller to offset any problems. This negotiation can ultimately impact your bottom line and whether the commercial asset makes or loses you money.
Another important aspect of buying and selling commercial real estate is the potential transfer of legal liability to the new owner. If commercial property is found to violate certain laws, it can be subject to government regulation. For example, once it is determined that a commercial property is the site of an environmental hazard, the current owner must clean it up – regardless of who created the hazard.
Environmental clean-up can cost more than the property itself is worth. The process of buying and selling commercial real estate requires various types of professional assessments to ensure that the new buyer is not taking on an eventual liability.
Loss of Liquidity
Commercial real estate transactions typically tie up large sums of liquid assets. In a down market, owners can have a hard time selling the property. Owners can have trouble with tenants and vacancy rates that affect their ability to make financing payments on the property.
If payments to the lender fall behind, commercial property is subject to foreclosure. Typically, commercial real estate purchases come with a lot of long-term risk. This risk must be realistically evaluated prior to making the purchase.
A Commercial Real Estate Lawyer Can Help
The law surrounding the purchase and sale of commercial reseal estate is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a lawyer who deals in commercial real estate.