Real Estate Education

The term usually refers to retail properties, office buildings, shopping centers, hotels, warehouses, manufacturing facilities, apartment complexes and vacant land that has the potential for development for these types of buildings. By and large, almost any kind of real estate except single-family home and single-family lots can be regarded as commercial real estate.

Yes. A real estate agreement that consists only of an oral understanding and a handshake will not be enforced by a court. An ancient law called the Statute of Fraud requires that real estate sales contracts be in writing.

A contract does not have to be complicated to be valid. If it describes the property and the price, it usually will be enforceable in court. However, it is not a good idea to rely on a bare-bones contract when you purchase commercial real estate. You need much more detail.

Since every real estate deal is unique, you will need to get advice from an attorney on how best to protect your interests in the contract. Typically,  your contract should address at least the following issues:

(1) An exact description of the property you are buying, including the land surrounding the building.

(2) The purchase price and whether it is all due at closing or in installments.

(3) A list of any equipment or personal property that is included in your purchase.

(4) Any contingencies that must be met before you are obligated to complete the purchase. For example, you can write the contract contingent on your ability to get a mortgage loan.

(5) How property taxes and utility bills will be pro-rated (allocated) between you and the seller.

(6) The type of title evidence or title insurance the seller must provide.

(7) The date for closing and delivery of possession.

(8) What legal recourse a party has if the other party defaults.

Your lawyer may advise you to include several other provisions as well.

It is the right a seller grants a buyer to buy real estate within a certain period of time. For example, suppose you are interested in buying an office building, but want more time to investigate the cash flow and compare this building to others in your area. You might offer to pay the owner an option fee to tie up the property. In return, the owner might be willing to grant you the right to buy the building within a certain period, say, six months, at a stated price. The owner would not be able to sell to anyone else in meantime.

You could agree that all or part of the option fee would apply toward the purchase if you decided to actually purchase the property. If you did not exercise your option, you would forfeit your option fee.

Contingencies are escape clauses in a real estate contract. They let you walk away from the deal without penalty if certain conditions are not met. You might, for example, sign a contract to buy a building, but make your obligation to close contingent on things such as the following:

(1) Your being able to get a mortgage loan of at least 75% of the purchase price.

(2) Your having a contractor inspect the condition of the building and your being satisfied with the contractor's report.

(3) Your determination that the building can be renovated to your satisfaction.

(4) Your being satisfied with a report you will order concerning environmental hazards.

Your lawyer can help you put the right contingencies in the contract for your deal.

You may be able to get the zoning changed or perhaps the local zoning board has authority to grant you a variance or exception so that you can use the building the way you would like to. See our section on Zoning for more information.

One way to proceed is to sign a sales contract, including a clause that makes your obligation to close contingent on your being able to change the zoning or to get a variance from the local zoning board for your intended use. Another possibility is to get an option from the owner, and then investigate the possibility of changing the zoning to the use you require. If you are granted the variance during the option period, you can exercise your option and buy the property.

Quite commonly, the tenant pays a base rent, often tied to the amount of square feet the space occupies. In addition, the lease may require the tenant to pay a certain percentage of their gross sales.

Shopping center tenants often pay a monthly Common Area Maintenance fee toward a portion of the expenses of maintaining the common areas of the shopping center and may also pay for part of the property taxes.

Generally not. If a tenant has a legally valid tenancy and is current on the rent and all other lease obligations, the law usually lets the tenant remain in possession until the end of the lease, regardless of who owns the building.Your best bet is to ask the owner for the legal status of each tenant since your ownership of the building will be subject to those leases. You may need an attorney's assistance in evaluating how to deal with the tenants.

Title insurance guarantees that you are receiving full legal ownership of the commercial property that you are buying. If a lien on the property later appears, or it turns out some other property owner has the right to use your parking lot, you can sue the title insurance company to recover any loss that you have suffered.

Having a title insurance policy takes much of the legal risk out of buying a building. Usually the seller pays the insurance premium for this coverage, but sometimes it is paid by both parties or the buyer alone.

Every business has its own jargon and the commercial real estate business is no exception. Many office and retail buildings start out with tenant spaces consisting of little more than four walls and a door. The owner of the space will then agree to finish the space to meet the specific needs of each tenant.The process of finishing this raw space is known as the "build-out." There can be extensive negotiations between the building owner (landlord) and the tenant over:

(1) What improvements will be made?

(2) Who will pay for these improvements?

(3) Who will be in charge of getting the work done?

(4) What the tenant will be permitted (or required) to remove at the end of the lease?

It's a letter signed by a commercial landlord and a commercial tenant dealing with all the issues pertaining to the build-out of the tenant's space.

Sometimes it is a separate letter; at others times, it is simply an exhibit attached to the lease.

Property damage insurance will help protect your investment if your building is damaged or destroyed by fire or other causes. Public liability coverage will protect you if someone is hurt in the building and sues you.

Also consider rent interruption insurance to make sure you do not lose rental income while you are repairing damage caused by a disater.

Often there are taxes and utility bills that cover periods both before and after the closing. These expenses need to be allocated between buyer and seller. In the real estate industry, these allocations are called "pro-rations."

To avoid problems at closing over the details of these pro-rations, you should describe the mechanics in the sales contract.

It's simply an arrangement where a third party - such as a title insurance company or a lawyer - holds money or documents and distributes them according to instructions from both parties.

In a commercial real estate transaction, for example, the escrow agent may obtain funds and documents from the buyer, the seller, and the commercial lender. When everything is ready, the escrow agents make sure the money and paperwork are in the right hands. Escrow agents make transactions flow smoothly and reliably.

Fixtures are the parts of the building that are permanently in place and cannot be removed without damage to the building. The plumbing system is an example. Usually, fixtures are included when you buy a building. On the other hand, items that are not attached or are easily removed are considered to be personal property. Office equipment is an example. Usually, personal property is not included when you buy a building, unless specifically listed in the sales contract.Some items, such as a window air conditioner, might fall into either category. To avoid disputes, it is a good idea to specify in the sales contract how to deal with such items.

You can, of course, take title in your own name, but you may want to consider forming a corporation or limited liability company (LLC) and put the legal title in the name of the business entity. This requires more paperwork and a bit more expense, but you limit your personal liability if someone gets hurt on your property.By limiting personal liability, you decrease the risk that you could lose your other assets, such as your home and personal bank accounts if there is a big verdict in favor of an injured person.

Your attorney can help you decide if putting your commercial real estate into a separate legal entity is the best thing for you

Yes, the buyer is always free to accept the risk of a title defect, but should first consult with an attorney to make sure the risk is minimal. There often are ways to reduce the risk to manageable proportions. For example, the title insurance may be willing to insure over the risk if appropriate affidavits are signed or if money is placed in escrow to cover the risk. In some cases, the seller may be willing to put money in escrow so there are funds on hand to pay off a construction lien if the lien holder goes to court during the statutory period and wins.

If there is a boundary line dispute, you, as the buyer, may decide to buy the property anyway if only a small piece of the property is involved in the dispute. Your reasoning may be that even if you lose the disputed area, the remaining land that you are buying is well worth what you are paying.

Similarly, if there is some problem with the building itself, for example, a defective heating and air conditioning system, and the seller is not willing to fix it, you may decide that you are getting such a good deal on the building that you will proceed with the purchase despite the defect.

It is another word for condemnation, the right of the government to take private property for a public purpose. For example, the government may take land to make way for a road. The Constitution requires the government to pay you fair compensation if it takes your property.

Legally speaking, it is some condition on your property or some use of your property that interferes with a neighboring owner's ability to enjoy their property. For example, if dense smoke or loud noises are emitted from your property, a neighboring owner can claim it is a nuisance.A judge may require you to stop creating the nuisance and to compensate the other owner for any losses.

If you have done everything required of you in the sales contract, you can go to court and seek "specific performance" - a judge's order requiring the seller to transfer the property to you.

As an alternative, you can sue for monetary damages. For example, if the contract has a purchase price of $500,000 and you can show its fair market value is $550,000, the judge may award you the $50,000 difference.

Often it is. By signing a letter of intent, especially in a complex transaction, you know earlier on that you and the seller agree on the major terms of the deal. Obviously, it is better to know this before you put time and expense into preparing the contract itself.

A word of caution, however: The letter of intent should state specifically that it is not a binding agreement. Only the contract itself should be binding. You want to be free to get out of the deal if you and the seller cannot reach agreement on the final details of the contract.

In most states, if your contract does not cover this subject, the risk of loss is on the seller. In other words, if the building is damaged by fire before the closing, the buyer can cancel the purchase unless the seller restores the building to its prior condition.Since this is an important issue, it is best to cover it in the contract rather than to rely on the prevailing law. You and the seller can tailor this term to meet your own needs and wishes. In case of a legal dispute, a judge or arbitrator will make every effort to carry out the intentions of the parties as stated in the contract.

Typically, a sales contract drafted by an atorney will spell out the remedies for default. For example, if the buyer defaults, the contract may say that the seller can keep the deposit as liquidated damages.

If there is nothing in the contract dealing with default, then in most states, if the seller defaults, the buyer can go to court and seek an order of specific performance. This order commands the seller, under penalty of being held in contempt of court, to transfer the property to the buyer upon payment of the agreed purchase price. This is based on the assumption that each piece of real estate is unique and that money alone may not adequately compensate the buyer for loss of the desired property.

Alternatively, the buyer can sue for difference money damages: the difference between the contract price and the fair market value of the property, assuming it is higher than the contract price. The buyer may also be able to recover consequential damages such as mortgage application fees and appraisal fees paid in reliance on the contract.

If the buyer defaults, the seller can sue for difference money damages as well. In this case, it would be the difference between the contract price and the lower fair market price. For example, suppose the contract calls for the buyer to pay $500,000, but the fair market value of the property is only $450,000. The seller could try to get a judgment awarding the $50,000 in lost profit. It is relatively uncommon for a court to order a buyer to complete the purchase by paying the entire purchase price.

Ffor either party to owe a broker's fee, often called a commission, there must be a written agreement, often called a listing agreement, signed by the party who is to pay the fee. No agreement, no fee. The fee is usually stated as a percentage of the sales price.

Assuming there is a written agreement, it alone will determine when the fee is owed. Commonly, the fee agreement will provide that the seller will owe the broker's fee when the property is sold to a person produced by the broker during the agreed upon listing period. The fee agreement may also say that the seller owes the broker's fee if the property is sold to anyone during the listing period, whether or not the buyer was produced by the broker.

In some commercial real estate deals, the buyer and seller agree to split the broker's fee.

No. Representations and warranties are always a matter for negotiation. There are many commercial real estate contracts that say, in effect: "The property is being sold 'as is.' Seller makes no representations or warranties."

When a seller is making representations and warranties, the seller's attorney may insist on adding the cautionary words, " . . . to the best of seller's knowledge." That way, the seller is not guaranteeing unknown facts or conditions.

If you are buying income-producing property, your lawyer may want the seller to guarantee the accuracy of the rental income figures as well as the expenses the seller has represented to you. You may also want the sales contract to include a statement that the seller is aware of no hidden defects in the building - that is, defects that your inspector is unlikely to discover.

There is no hard and fast rule. In general, it is always preferable to have a fresh survey so you know exactly what you are buying. However, if there has been a survey within the past few years, and you are convinced after looking at the property that nothing has changed, your attorney may tell you that you can safely avoid getting a new survey.

Be aware, that if you are borrowing money from a commercial lender, the lender will probably order a mini-survey, sometimes called a mortgage report. While this is not as good as a full survey ordered for your benefit, your attorney may conclude that it is adequate for your needs. This is particularly true if, based on the lender's survey, the title insurance company is willing to guarantee that there are no boundary line problems.