Commercial Real Estate can be a great investment. However, commercial deals are often more complicated than residential. Everything from the due diligence to the contracts are more involved. That is why any investor who is contemplating a commercial investment should understand all the nuances of these types of deal before getting started. This post will talk about some of the different types of real estate contact provisions in commercial deals that every investor should understand before getting started.
Due Diligence Clause
The clause must be carefully drafted... so it is important to consult with counsel before signing. Edward Schenkel
Due Diligence is important in any real estate acquisition, residential or commercial. However, in commercial, due diligence encompasses many more things and is more complicated. Accordingly, it is essential that the due diligence provision in commercial contracts is drafted broadly to allow the investor to inspect more than just the physical condition of the property. An investor should be entitled to conduct due diligence on zoning, environmental (including phase 1 and phase 2 testing), tenant leases, owner contracts, and the financials of the property. The clause must be carefully drafted to allow you to get out of the deal if any of one these are not satisfactory so it is important to consult with counsel before signing.
Permitting Contingency Clause
...it is essential to have a contingency clause in the contract... Edward Schenkel
Unlike residential acquisitions, you may have plans to add an addition to the commercial property, construct a new building on the parcel, or move a new anchor tenant to the property soon after the closing. These plans may require some sort of zoning permit from the City or Town for your plan to legally materialize. Accordingly, it is important to determine if such a permit is needed. If important to your investment, it is essential to have a contingency clause in the contract that makes it clear that the closing is contingent on obtaining the permit. If you do not include this clause, you may be obligated to purchase a property without the ability to bring your vision to reality.
Financing Contingency Clause
...it is imperative to describe all financing sources in the contingency... Edwards Schenkel
As with a residential deal, Commercial real estate contracts should have a financing contingency provision if financing will be used. However, financing contingency provisions in commercial deals may be more involved as there is creative and nontraditional financing often utilized in commercial deals that are not typically used in residential transactions. Therefore, it is important that the financing contingency in commercial deals is carefully drafted to reflect the particular financing that is being used. For example, if there is a combination of two private lenders combined with owner financing, it is imperative to describe all financing sources in the contingency so that the deal is expressly contingency on obtaining all of the necessary financing.
Estoppel Certificates
...a provision that entitles the buyer to estoppel certificates is imperative. Edward Schenkel
A commercial deal will often involve the sale of the property with tenants in place. Accordingly, it is essential for the Buyer to confirm that the leases are in full force and effect; that there is no default on the lease payments; and that both the tenant and current owner are in compliance with the lease and there are no violations. Estoppel Certificates will allow the Buyer to close with an assurance that the tenants are not behind on the rent. Accordingly, a provision that entitles the Buyer to estoppel certificates is imperative.
Seller Representations
The seller representation should be clear... Edward Schenkel
Seller representations and warranties are important in any real estate transaction, but particularly in commercial because there are different issues involved such as potential environmental concerns and different zoning issues. The Seller representations should be clear, and specifically note whether they are to the best of Seller’s knowledge and which representations survive closing. Common Seller representations and warranties include that the property is in compliance with the zoning and building regulations; that there are is no environmental contamination; that the leases, contracts, and financials provided to the Buyer are complete and accurate; and that the Seller (if a company) has the authority to enter into the contract.
In summary, commercial real estate can be a great investment but it is important to know all of the different issues before signing a contract for a commercial deal. Please ask any questions you here about commercial real estate contracts.