THE ABCs OF BUYING COMMERCIAL REAL ESTATE
by Paul B. Kilgore

What happens when your business's lease expires? Or growth forces your business to find a new home? Or the perfect site for your business suddenly appears on the market? You need not be in the business of real estate to suddenly find yourself confronted with the prospect of buying commercial property. What do you need to know?

For starters, you should be aware that you don't need to become an expert. That's what real estate agents, attorneys, and accountants are for. But you do need to have a general understanding of the process involved in buying real estate.

A real estate agent can help you locate a property that will suit your business's needs. The agent may also be able to give you helpful advice in offering a price that will satisfy both you and the seller. Ultimately, however, the two most critical issues -- whether a property is suitable, and at what price -- will be made by you alone. My experience has been that most business people, even those who have never purchased real estate before, are well equipped to deal with these two issues.

This is the point at which a real estate attorney usually becomes involved. The attorney's first job will be to deliver to the parties a purchase agreement which not only expresses the buyer's and seller's informal agreement, but also deals with issues neither party may have contemplated. What, for example, is actually being purchased? Land? Land and a building? Equipment? Furniture? Leases, plans, or permits which may be held by the seller?

And how will payment for the property be made? The parties may have agreed on a purchase price, but have they discussed the size of an earnest money deposit or downpayment? Will the purchase price be financed and, if so, is the purchase contingent on the buyer obtaining favorable loan terms? Will the sale be financed by the seller, perhaps with a contract for deed?

These questions hint at the complexity involved in acquiring commercial real estate. Buyers are usually surprised by the number of issues that appear as they focus on the details of completing the purchase. Will the property be sold "as is," or will the seller give warranties? What warranties? How can the buyer be assured that hazardous materials used at the property have not resulted in contamination? Who will pay to update the seller's twenty-year-old survey? Will the parties agree to arbitrate any disputes rather than go to court?

Buyers often find that an extensive examination of the property is necessary before deciding whether to proceed with the purchase. Many purchase agreements allow the buyer an inspection or "due diligence" period to learn about the property. Some inspection periods are as short as a few days, but most extend for at least a few weeks. The buyer's inspection might include anything from zoning issues to the building's structural integrity to the environmental condition of the land. At the end of the inspection period the buyer, armed with the information he or she has obtained, will decide whether to proceed with the purchase.

The advantages to a buyer of an inspection period are obvious. There are advantages for a seller as well. For one thing, the cost of the examination -- which may be quite high when one considers that the services of engineers, environmental consultants, and other professionals may be required -- is typically borne by the seller. More importantly, the first-hand knowledge obtained by a buyer gives a seller a little more freedom in refusing to provide the property warranties and representations a buyer might otherwise expect.

Once the inspection period ends some of the responsibility for completing the transaction leaves the buyer's and seller's hands. The buyer's lender may undertake its own inspections. An appraisal may be ordered. A title insurance company will become involved.

The process of title examination need not confuse a buyer. Most business people have a passing familiarity with abstracts or certificates of title. Ten years ago an attorney's examination of an abstract, followed by a title opinion, would be an integral part of any real estate purchase. Commercial pressures have changed this: attorneys' title opinions have been replaced by title insurance commitments. These commitments, which may be issued by an attorney but are most often produced by title companies, have two functions. First, they list the documents which must be submitted at closing to ensure the buyer receives marketable title. Second, they describe property interests (easements or restrictive covenants, for example) that will remain after closing.

Most closings occur between 30 and 60 days after execution of the purchase agreement (or, if an inspection period is involved, after the buyer has confirmed its commitment to purchase the property). The closing will typically take place at the offices of the title company that issued the title commitment. The title company's closer will have the responsibility for allocating closing costs as provided in the purchase agreement, disbursing the purchase funds, and recording the deed and any other conveyance or financing documents.

While relocating your business is an undeniable disruption, the disruption is only temporary. Most buyers find that the advantages of their new site -- the reason they decided to buy in the first place -- justify the commitment required by the move. If there is a secret to buying commercial real estate, it is this: Keep focused on the big picture even as you work through the details necessary to make your new business home a reality.

BUYING COMMERIAL REAL ESTATE: THE BASICS
By Paul B. Kilgore

When your business is confronted with the prospect of buying commercial
real estate due to growth, an expired lease, or the unexpected availability
of the perfect site the most immediate concerns will be location and
price.

While most business people, even those who have never purchased real estate
before, are well equipped to deal with these issues, putting together a purchase
agreement typically causes the parties to confront matters they may not have
considered. What, for example, is actually being purchased? Land? Land
and a building? Equipment? Furniture? Leases, plans, or permits which may be
held by the seller?

And how will payment for the property be made? Will the purchase price be
financed and, if so, is the purchase contingent on the buyer obtaining favorable
loan terms? Will the sale be financed by the seller, perhaps with a contract for
deed?

These questions hint at the complexity involved in acquiring commercial real
estate. Buyers are usually surprised by the number of issues that appear as they
focus on the details of completing the purchase. Will the property be sold "as is,"
or will the seller give warranties? What warranties? How can the buyer be
protected against hazardous material contamination? Who will pay for the
survey? Will the parties agree to arbitrate any disputes rather than go to court?

Buyers will find that an examination of the property is necessary. The inspection
(or due diligence) period permitted by the purchase agreement typically extends for at least a few weeks; the buyer's inspection may include anything from zoning issues to the building's structural integrity to the environmental condition of
the land.

The advantages to a buyer of an inspection period are obvious. There are
advantages for a seller as well. For one thing, the cost of the examination is
typically borne by the buyer. More importantly, the first-hand knowledge
obtained by a buyer gives a seller some justification in refusing to provide
the property warranties and representations a buyer might otherwise expect.

Once the inspection period ends, some of the responsibility for completing the
transaction leaves the buyer's and seller's hands. The buyer's lender may
undertake its own inspections. An appraisal may be ordered. A title insurance
company will become involved.

The process of title examination need not confuse a buyer. Most business people
have a passing familiarity with abstracts or certificates of title. Ten or fifteen years ago an attorney's examination of an abstract, followed by a title opinion, would be an integral part of any real estate purchase. Commercial pressures have changed this: attorneys' title opinions have been replaced by title insurance commitments. These commitments, which are most often produced by title companies, have two functions. First, they identify the documents that must be submitted at closing to ensure the buyer receives marketable title. Second, they describe property interests (easementsor restrictive covenants, for example) that will remain after closing.

Most closings occur between 30 and 60 days after execution of the purchase
agreement. The closer will have the responsibility for allocating closing costs as
provided in the purchase agreement, disbursing the purchase funds, and
recording the deed and any other conveyance or financing documents.

While relocating your business is an undeniable disruption, the disruption is only
temporary. Most buyers find that the advantages of a new site justify the
commitment required by the move. If there is a secret to buying commercial
real estate, it is this: Keep focused on the big picture even as you work through
the details necessary to make your new location a reality.