FAQs For Commercial Real Estate
Q: What exactly is commercial real estate?
A: 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 buying, selling, or developing raw land, owning rental houses, or selling real property along with and as part of the sale of a business. It might be industrial or agricultural property.
Q: What are common risks in a commercial real estate deal?
A: 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 zoning issues. Also, there will always be questions about the suitability of the property’s location for your business needs.
Furthermore, in many instances, you aren’t afforded the same consumer protections on a commercial real estate deal that may be available when you purchase a residence.
Q: Does title insurance guarantee perfect title?
A: No, title insurance is nothing more than an insurance policy that provides good and marketable title to the property being insured. However, this does not mean 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 commitment. These include specific exceptions listed on the property to be insured, as well as standard exceptions listed in schedules B and C.
One standard exception, for example, is that the insurance will only be provided for exceptions to title that are reflected by the public records. Unless a special endorsement is obtained, there’s no obligation on the insurance company to insure against defects in title that would have been apparent from surveying or otherwise physically inspecting the property.
There are also different types of policies. For example, it’s customary for a seller to pay for standard coverage for the buyer that insures that the deed from the seller is conveying title that it purports to convey, subject to exceptions in the title report. If a buyer wants additional protection against third party claims, the buyer can purchase an owner’s policy. If a loan is involved, a lender’s policy will be required that specifically insures the lender’s loan and lien position.
Q: Should I buy commercial property with a company I own rather than personally?
A: There are many issues that can arise with respect to how you take title to property, and especially so in a commercial context. If you take title as an individual, you may be exposing yourself to potential liability exposure for anything, including injuries that occur on the property. In order to avoid those liabilities, it is common for purchasers to form an LLC to purchase and own the property. Badeaux and Associates will form an LLC for you.
Q: If I hire a real estate broker, why do I need to hire a lawyer?
A: A real estate broker is invaluable for locating properties, knowing market values, and listing a property for sale. However, real estate agents cannot provide legal advice and that advice would include negotiation of the legal provisions of the earnest money contracts. Additionally, real estate agents don’t get paid unless the deal closes, so attorneys who get paid hourly whether the deal closes or not, are in a better position to be objective. By their nature, attorneys advise their clients on the “what if’s” and try to minimize the clients’ risks, whether that client is a buyer or seller. Hiring an attorney on the front end of the deal could save a client from hiring a trial attorney on the back-end of the deal when there is a serious problem, costing much higher fees.
Q: What should be in a real estate purchase contract?
A: Real estate contracts can be complex in order to try to address all the “what if’s” that are typically involved in a commercial real estate transaction. Points that would typically be covered include:
- Recitals (background facts as to why the parties are doing the deal)
- Description of the property
- Sales price and terms of payment
- Title and title insurance
- Closing date
- Escrow provisions
- Conditions to closing
- Representations and warranties
- Environmental and hazardous waste provisions
- Zoning and land use issues
- Rights to inspection
- 1031 exchange provisions, if applicable
- Liability insurance requirements
- Indemnification and hold harmless provisions
- Remedies if a party breaches
- Rights to amend and modify
- Term and termination
- Rights to assignment or delegation of rights
- Attorneys’ fees and costs
- Arbitration rights, if any
- Governing laws
- Other standard provisions
Q: What is a “1031 exchange”?
A: 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’s 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 for receiving an interest in another piece of commercial property. The rules for a 1031 exchange can be quite complex and it is easy for a seller to run afoul with them. It’s always advisable to have competent legal counsel involved in the transaction.
Q: What does the Law Firm of Badeaux and Associates provide?