Five Mistakes to Avoid in CRE Acquisitions
Navigating the legal complexities of commercial real estate transactions can be a costly endeavor, with legal fees often exceeding budget constraints for smaller transactions, often resulting in entrepreneurs and investors trying to navigate transactions without legal guidance. This article aims to provide insights to help avoid common mistakes and to provide you with a better understanding of when to seek professional guidance.
1. Not Fully Understanding the Terms of the Contract
Finding a great deal can be hard, and while it is often necessary to accept suboptimal contract terms to get a deal under contract, it is still paramount to understand all the terms of the contract. Relying on forms or brokers without really understanding what you are getting into can be a problem if a deal goes sideways. Make sure you understand all the deadlines, remedies, indemnities, and other provisions in the agreement, and if there is anything you don’t understand, take the time to ask questions and get clarification before signing the contract.
2. Not Getting Proper Title Insurance
Title insurance is an essential component of a commercial real estate transaction and protects the buyer from any issues that may arise in the future with the title to the property. Unlike residential title policies, commercial title insurance policies have various forms of available coverage, and more importantly, certain types of endorsements to that coverage that may be necessary or desirable under the circumstances. Buyers should also obtain a property survey to ensure the boundaries of the property are accurate, to confirm there are no problematic encroachments, to understand the location of easements that could affect development plans, and to ensure the property has proper access. Making sure to thoroughly review title and a survey is also critical to ensuring that the property has all the access rights and easements necessary for your given use and to confirm that there are no additional costs that run with ownership of the land, such as maintenance agreements with neighbors), as discovering such agreements after closing could present issues for your business plan.
3. Not Performing Appropriate Due Diligence
Due diligence is the process of assessing a potential investment before making a final decision. This can include researching the zoning, the property condition, underlying title documents, such as covenants and restrictions recorded against the property, proper survey, reviewing property financials, reviewing any leases, and conducting an environmental assessment. Taking the time to perform due diligence can help you identify any potential issues with the property before committing.
4. Not Understanding Local Laws and Customs
Every state has specific laws and regulations that can affect the purchase, sale, or financing of a commercial real estate transaction. Details like how real estate taxes are calculated and assessed, the proper form of conveyance documents, and basics like how closing costs are customarily prorated can make a significant impact on your closing costs and ongoing operations expenses.
5. Not Negotiating “Market” Terms
Negotiating is an important step in the commercial real estate transaction process, whether you are buying or selling. While most investors focus on the basic contract terms, like the purchase price or interest rate, a common pitfall is ignoring other important provisions in the agreements, or not understanding what is considered customary or “market” for those other provisions. Not negotiating the finer details in your agreements can lead to increased risk or liability or worse. You can refer to our
By avoiding these common legal mistakes, you can help ensure that your commercial real estate transaction goes smoothly. Take the time to research the property, understand the contract terms, and enlist qualified professionals' help. Doing so can help protect your interests and save you time and money in the long run.
