Frequently Asked Questions

Commercial Real Estate

What exactly is commercial real estate?

Broadly defined, the term commercial real estate can be used to refer to any dealing with real property in a business context. It could involve leasing out office space, owning an apartment complex, or selling real property along with and as part of the sale of a business. It might be industrial or agricultural property. It could even involve residential properties like apartment compelxes or rental houses being held for business or income-producing purposes. It can even involve working with the government. Unless the property is a residence where the homeowner is living, you are probably dealing with commercial real estate.

Are there really that many differences between a commercial real estate deal and buying a house?

While many of the concepts are the same, there can be huge differences between commercial and residential real estae. Commercial real estate transactions can be far more diverse and wide-ranging than selling homes. Any real estate deal has its share of risks, and problems can arise that you could never possible foresee. In general, however, the risk and potential liability exposure that you face on a commercial real estate deal can be much greater than when you buy a house. Look at it from this perspective; by and large, we all have a pretty good idea of what goes on in a typical family home, but can you say the same thing about a piece of business property? Depending on the nature of the business, commercial property may have all kinds of liens and title problems. There may be greater concerns about hazardous materials or zoneing issues. And there will always be questions about the suitability of the property’s location for your business needs.
Futhermore, in many instances, you are not afforded the same consumer protections on a commercial real estate deal that may be available when you purchase a residence. In some states, for example, residential homebuyers are given greater protections against abusive lending practices than are business owners. Likewise, there are mandatory disclosures required in residential real estate matters that may or may not be requried in a commercial transaction.

Should I hire a real estate broker or a real estate lawyer?

There are many reasons why you should hire your own real estae broker (or an agent who may work for a broker). The broker or agent should have specific expertise in commercial real estae, and particularly in the area where you need it such as office space, retail space, industrial warehouse space, apartment complexes, argricultural land, etc. Even if you’re just leasing property, a real estate broker may be invaluable. If he or she is good, an agent will go out and find property for you. The agent will also serve as an arm’s-length intermediary to negotiate on your behalf, which can be much more effective than you trying to negotiate the deal yourself. Keep in mind, too, that real estate agents work on similar deals all the time, so presumable know what they are doing. Their knowledge and contacts can well be worth the cost of commission. They can also help you with the paperwork, to make sure you correctly submit an offer.

What is title insurance and why is it necessary?

Title insurance is nothing more than an insurance policy that provides assurance to interested parties that there is good and marketable title to the property being insured. However, this never means that title insurance guarantees perfect title. As with all insurance, there are a number of different types of policies and endorsements. There are also many exceptions to title, which all tie back into information in the preliminary title report. These include specific exceptions listed on the property to be insured, as well as standard exceptions.

Are there different types of deeds, and why should I care?

The type of deed can make a big difference. In some states, the typical conveyance is a grant deed, which basicly says the seller has a interest in the property and that it is being conveyed to the buyer, but not necessarily with any representations or warranties as to title. Other states have warranty deeds that go a step further to provide a warranty that the seller has good title to the interest being conveyed. All states have something like a quit claim deed where a party is only signing over whatever interest that party has in the property, if any.
The bottom line is that you could take a deed from someone that means nothing. While this may amount to fraud on the part of the seller, who wants to have to sue someone to try to enforce your rights? And you may not even have a good case if, for example, you accepted a quit claim deed that says that you got only whatever interest the other party had, which may have been nothing. You can see the need to get competent legal advice.

What is a 1031 exchange and why do I care?

A 1031 exchange refers to a method of deferring tax on the sale of an interest in real property allowed under section 1031 of the Internal Revenue Code. In brief, it allows a seller to defer tax on a gain that would otherwise be realized on a sale of property if the proceeds from the sale were reinvested in like-kind property. It is quite common for a 1031 exchange to be involved in some manner in a commercial real estate transaction.
A seller must contractually arrange to convey his or her interest in the property being sold in exchange from receiving an interest in another piece of commercial property. If cash is involved, an escrow company or facilitator usually it, because treatment under section 1031 exchange can be quite complex and it is easy for a seller to run afoul with them. It is always advisable to have competent legal counsel involved in the transaction.

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