Commercial Real Estate Transactions.

Commercial real estate transactions involve more complex issues than residential transactions.  The difference between the two types of transactions at the simplest is the type of property sold. A commercial real estate sale contract involves a particular type of property, property that is sold or purchased for business or investment purposes.  The property can be of any of a large number of types: unimproved or improved; improved with residential or nonresidential structures; retail or warehouse; vacant or occupied. Each of these types of commercial properties will dictate a slightly different commercial real estate contract and terms of sale, thus the sale of a mixed-use, multi-tenant office/shopping complex, for example, will dictate the use of numerous contractual provisions that are not necessary in connection with the sale of unimproved land held for investment or a single-user commercial building. Mr. Siebert’s education and background, along with his experience make him uniquely well qualified to assist his clients in their commercial real estate transaction

Contract

The process of negotiating the terms of and the execution of commercial real estate sale contracts usually does not follow the procedure in a residential transaction. Although real estate brokers are frequently involved retained in commercial real estate sales, commercial brokers generally do not assist the parties with completing a standardized contract; rather, the real estate sale contracts are generally prepared and negotiated through the parties’ attorneys. Commercial brokers frequently prepare a non-binding letter of intent which the parties execute setting forth the general terms the parties have agreed to in principal, and then submitted to one of the attorneys in connection with the preparation of the contract. The initial draft contract is then sent to the other attorney for review, and revisions are negotiated and drafted from that point on through the attorneys.

Due Diligence

Before purchasing commercial real estate and making the significant investment and commitment that often accompany such a purchase, a purchaser generally will require that the seller allow for the right of the purchaser to investigate and examine various aspects of the real estate and to assess the economic viability of the purchaser’s intended use of the real estate. This right to investigate is commonly known as the purchaser’s “due diligence,” and the time period allowed to conduct this investigation is known as the “due diligence period.”

Due diligence can involve how the property is or can be used. The application of zoning to commercial real estate is substantial. Buyers, sellers, and owners of commercial real estate must consider zoning requirements for many issues. All parties are considered to have constructive knowledge of zoning restrictions. Will the new owners have to install sprinklers, or not? Can the new owner add additional parking?

Due diligence involves examining the current financial information as well. Performing due diligence on leases for the acquisition of a commercial property requires some understanding of the various types of leases — what the underlying “norm” is for each and its impact on the economic analysis of the property. In addition, the issues that need to be investigated vary depending on the type of lease and property involved. Will the new owner generate sufficient rental income to cover his debt service or not?

Generally, due diligence provisions allow for the purchaser to terminate the real estate sale contract based on its disapproval of the property as a result of its due diligence. It is one of the most important provisions of the contract which works most effectively when it is tailored to the transaction at hand as a result of a close working understanding between the party and his or her attorney. Mr. Siebert always attempts to establish such a relationship with his clients so that the terms which are most important to his clients’ business are closely examined.

Environmental Concerns

Virtually every commercial real estate transaction has an environmental component. Even if the property has never been used in any way that would raise any environmental concerns, and there are no adjacent or nearby properties of concern, most all lenders will require at least a Level I Environmental Audit done on any commercial property prior to lending any money on that property. It is important that a client’s attorney be able to understand his clients concerns and the impacts on the environmental issues on either the sale or the purchase of the client’s commercial property. Mr. Siebert background as well as his time as an Assistant Attorney General in the Environmental Law Division gives him a unique understanding of these issues and the ability to assist his clients through the maze of issues which often arise in this regard.

1031-Starker Like-Kind Exchange

When a seller of an investment or commercial property sells that property, tax is due on the capital gain between the sales price on the property on the basis.  If done correctly, a Seller can defer capital gains tax by purchasing a new replacement property, when the sale and replacement of property is structured as an exchange.  The tax benefit translates into immediate cash savings of up to 28% for individuals; 35% for corporations.

Like-Kind Exchanges of commercial real or personal property under Internal Revenue Code Section 1031 are tax exempt if handled properly.  It is also commonly referred to as a “Starker” trust, a Section 1031 Exchange or a Tax Deferred Exchange.

Consult with experienced attorney when a tax-free exchange is contemplated.  Mr. Siebert has the background and experience to help you in the purchase, sale or exchange of commercial property. If you need assistance in any commercial transaction contact Mr. Siebert’s office for assistance.

FOR MORE INFORMATION ON THIS SUBJECT OR TO SCHEDULE AN APPOINTMENT WITH MR. SIEBERT TO DISCUSS THIS OR ANY OTHER MATTER CONTACT MR. SIEBERT’S OFFICE.