Whether you are starting a new business, expanding a successful business, or simply relocating an existing business, purchasing a commercial property is an exciting process. You may even consider purchasing a commercial property for the rental income or as part of a real estate portfolio. For business owners and real estate investors alike, it is important to be aware of some common legal issues and challenges that may arise along the way, and consulting a qualified real estate attorney can provide peace of mind. This proactive approach will allow you to focus on other business considerations while ensuring a smooth acquisition process. Below are the top five legal considerations when buying commercial property.
I. Understanding the Terms of the Purchase Contract
The purchase contract outlines the rights and obligations of all parties involved. Commercial property purchase contracts can often be lengthy and complex. A properly drafted contract should clearly reflect the parties’ intentions and the terms and conditions. Some important provisions to review include the buyer contingencies for due diligence, financing, and title matters, representations and warranties from the seller regarding the condition of the property and improvements thereon, and proration of income and expenses related to the operation of the property.
II. Local Zoning Laws and Building Regulations
If you are purchasing a commercial property and are planning to make changes to the type of business conducted on the property, it is important to understand what the permitted land uses of the property are. Zoning regulations determine how the property can be used or developed. Familiarizing yourself with zoning laws, and confirming that you are able to operate your business at the property, during the due diligence period will allow you to terminate the contract in the event the zoning laws do not allow for your intended use.
While re-zoning may be an option, it is typically a lengthy and complex approval process that requires careful planning and legal guidance. It is equally important to verify local building codes and ensure the property is in compliance with all codes.
III. Defects in Title
Receiving a clean title, free of any liens, is a must. Prior ownership may have accrued liens, encumbrances, or other title issues which they may not disclose. It is possible that the seller may not even be aware of existing liens, violations or other issues relating to the property. A thorough title search is always recommended and title insurance is available to protect you from any unanticipated title issues in the future. Take proactive steps to mitigate risks and to ensure that your investment is protected.
IV. Environmental Considerations
State regulations have recently placed a larger emphasis on compliance with environmental laws, with non-compliance leading to large fines and remediation of the property. Environmental assessments should be conducted during the due diligence period to uncover any potential risks or prior contaminations.
First, it is important to review the historical uses of the property and conduct a site inspection and interviews to identify potential issues. Next, if the preliminary site assessment indicates potential contamination, on-site tests should be conducted to investigate any hazardous substances or other materials which may be present and the extent of such contamination. A proper environmental site assessment will ensure compliance with local, state and federal laws and the safety of your employees, while reducing the risk of future liability.
V. Financing Commercial Property Purchases
Financing a commercial property with the right loan terms will be essential to the deal’s success. Commercial loans are typically offered over a five-to ten-year period, upon which the owner will have to re-finance his property. Your capital stack may also include other forms of debt such as mezzanine debt (convertible debt). Understand all the terms of your loan agreement, such as your interest rate, repayment schedules, and prepayment penalties. It is crucial to have these documents reviewed by a real estate law attorney.
Purchasing a commercial property can be a complex and lengthy process that involves negotiating contracts, conducting due diligence, securing financing, and ensuring compliance with zoning regulations and other legal requirements. If you are considering purchasing a commercial property, do not hesitate to contact one of our experienced real estate attorneys at EPGD Business Law, with offices in Miami, FL, Washington, D.C., New York, NY and West Palm Beach, FL. Call us at (786) 837-6787 or email us to schedule a consultation.
