Tips When Investing in Commercial Real Estate

Tips When Investing in Commercial Real Estate

Investing in commercial real estate in the Hudson Valley requires careful planning and knowledge to avoid certain pitfalls.

Consider these eight tips before purchasing an investment property.

1. Identify your team
   Investing in commercial or other income producing property is not for the weak of heart, and the journey is not a solo flight.  Below are six individuals that should be part of your team.

1. Engineer
2. Environmental Auditor
3. Title Agent
4. Lawyer
5. Surveyor
6. Broker

The respective services of each are interrelated with the others.

2. Due Diligence

Most contracts for the purchase of commercial property should contain a provision which allows a buyer to investigate everything about the property and underlying deal, and based on that investigation, determine whether or not to continue moving forward with the deal.   A period of not less than 30 days and as much as 90 days is a reasonable range, of course tied to the nature of the property and the deal terms.

The down payment on contract should be refundable in the event the deal is canceled based on any facts the buyer discovers during due diligence and believes to be unsatisfactory.

3. Entity

The contract should be in the name of an entity, rather than in the name of individuals, so that liability will be limited.   Typically, the entity should be a “no asset” entity, meaning it does nothing but own that one piece of property.

4. Zoning-Use

Consult with your legal advisor before you go to municipal officials or the building department. Zoning laws, definitions, and tables of uses are highly particular and how you characterize your intended use is vital to how your proposed use will be addressed by the municipality.  Beware of “labeling” your project or use until you are sure of the implication of such label under the applicable zoning laws.

5. Real Property Taxes

Get a handle on the assessed value, equalization rate, and possible exemptions for the property prior to completing the sale.

6.  Financing

Contact sources of funding at the earliest time. The lender will want to know much of the information you will glean from due diligence. However, banks have lending policies as to location, nature of use, loan to value ratios, debt coverage etc., that can impact terms you may want to negotiate in your purchase deal.

7. Title Insurance

Order the preliminary report of binder (title report) as soon as you can. The condition of title can influence your due diligence efforts, evaluation of the property, and deal terms.

8.  A few other items to consider:

1. Time of the essence. Having this clause in a contract is a double-sided sword. It means the specified event – closing, due diligence, approval schedule, and/or mortgage commitment – must take place on a date certain, and that failure is a default. Sellers push for this clause, and buyers may be hesitant to agree since they do not fully control all the moving parts of the deal. If this clause is to be included, a buyer should consider also including a term that allows for an extension of time at the buyer’s election.
2. Limitation of Liability. A default in the performance of the contract can trigger certain remedies, which can include monetary damages, specific performance, and/or termination of the contract. The extent of remedies and potential liability should be specifically addressed and negotiated in the contract.

This is not intended to be legal advice.  You should contact an attorney for advice regarding your specific situation.  

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Marcia Jacobowitz is a partner concentrating on commercial and residential real estate, including landlord tenant issues and law.