Common Issues in Commercial Real Estate Transactions

Common Issues in Commercial Real Estate Transactions

Successfully completing a commercial real estate deal can be risky business, and the process is much more complex than a residential real estate transaction.

Property valuation is one factor that can become a big problem in a commercial real estate transaction. Defining the value of commercial real estate is difficult because the property might be completely unique and not have any similar sales to compare it to. Quite often, there is also an income component to consider if the property has an income stream that has to be worked into the deal.

Commercial real estate can also be subject to aggressive negotiations. Purchasers are responsible for doing their due diligence in these transactions, and they cannot rely solely on outdated consumer safety laws.

Purchasers have to clearly understand that, outside of fraud, there are no strong legal mechanisms to protect them or provide alternatives if the deal goes bad. For example, the mandatory disclosures given to residential purchasers are often not afforded to purchasers of commercial real estate.

Over-reaching can be an additional problem for buyers and sellers of commercial real estate. Parties involved should be wary of deals that are likely to require more capital or expertise than they currently possess. But, if affected, the idea is to realize when you are in too deep before the deal.

With all of this to consider, it is essential to hire experts to perform thorough legal and business due diligence before entering a commercial real estate transaction.

Assumption of Liability

Prior to acquiring a piece of commercial real estate, you will want to make sure you are not taking on liability for any violations of law that may currently exist. For example, if you buy the property and then find out that environmental risks exist, you will likely be accountable for eliminating the hazard—whether you are responsible for it or not.

Evaluating Financial Risk

Real estate can be a terrific investment for your business, though such purchases can also tie up a lot of liquid assets for an extended period of time. If you have trouble filling vacancies or gathering rent from tenants, you may or may not be able to make your required payments to your financing company. If may also take some time to sell the property if you run into financial difficulty, especially if the market is down.

Correct Property Evaluation
When you are shopping for a particular product, it is often easy to compare the price and quality of a similar product. But pieces of real estate are usually unique, with no exact comparison based on use, size, age, or state of the building or land—making accurate valuation far more challenging. Finally, any current income stream or future income related to commercial property should also be a factor in determining a fair and reasonable price.

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