PURCHASING A COMMERCIAL REAL ESTATE PROPERTY
In this article, we will discuss the legal considerations in purchasing a commercial real state property. We will assume for purposes of this article that the commercial real estate property is a building, which does not have any leases and is meant for one (1) business (not many businesses).
The Mainstreet Organization of Realtors Commercial Sales Contract describes the terms and conditions of the sales contract between a buyer and a seller. Like the Multi-State Residential Real Estate Contract 7.0, the Commercial Sales Contract has an attorney-review period.
Attorney Review Period
The Attorney Review Period must be submitted within five (5) business days after the Date of Acceptance. According to Paragraph 6(d) describes the ability to make suggested changes to the contract without the Contract being null and void. Proposed modifications under Paragraph 6(c) allow a buyer or seller to propose suggested modifications except for the purchase price. Unlike Paragraph 6(d), the Seller may declare the Contract null and void if the suggested modifications are not acceptable to them. Thus, the attorney review letter under Paragraph 6(d) is the appropriate method to suggest alternative terms to the Commercial Sales Contract. Hence, the purpose of the attorney-review period is to give the real estate attorneys the ability to strengthen the Commercial Sales Contract for the benefit of their client.
The Inspection Period and Environmental Assessment
Under Paragraph 7 of the Commercial Sales Contract, inspection and environmental site assessments are completed. The inspection period enables a buyer to hire an inspector to evaluate the condition of the commercial building at the Buyer’s expense. The Inspection Report also notes that the Buyer must indemnify the Seller against any loss or damage to the Real Estate caused by the acts or negligence of the Buyer or the Buyer’s agent performing the inspection.
The environmental assessment is the ability to hire a contract to examine any harmful defects caused by the commercial property that the buyer may be liable for in the future. Environmental site assessment is highly recommended for gas stations, farmland, and or any other commercial property that may benefit from an environmental site assessment.
Establishment of an LLC or other Entity for the Building
Establishing an LLC or other business entity to own the commercial property is highly recommended. An LLC is a Limited Liability Company, which is primarily for business liability purposes to isolate business liability concerns from a person’s personal liability. Many business owners will have a current business entity and will be tempted to purchase the commercial property with their business entity. This is highly not recommended because combing one’s business with their commercial building is putting all of one’s liability risks into one basket.
As a rule, the building and the business should be owned by separate business entities such as an LLC or S corporation. In many cases, bank financing likely will want a personal guarantee and want to review the LLC or S corporation that was created. The bank will want to ensure that the LLC Operating Agreement or the S Corporation Bylaws enable the purchase or refinance of a commercial property. Second, the terms of the LLC Operating Agreement and or the S corporation Bylaws will describe who has the managerial and or ownership ability to make major decisions such as purchasing a real estate property or refinancing the property.
One additional layer of protection is creating a holding company that owns the Building LLC and the Business S corporation or LLC. The benefit of the holding company is sheltering an individual or multiple person’s from being personally liable for the Building LLC and the Business S corporation or LLC. Typically, a Plaintiff filing a lawsuit will name the Building LLC and or the Business S corporation or LLC and the individual owners of the business in their personal capacity.
Thus, setting up a holding company as the LLC limits the owner’s personal liability because they are not operating the Building LLC or Business S corporation or LLC in their personal name. It will be important to have the Building LLC to have a commercial sales contract with the Business S corporation or LLC. The Commercial Lease should contain the major terms of the landlord and tenant relationship.
Zoning and Business License Considerations
The zoning restrictions of a commercial real estate property are crucial. The zoning type informs the buyer of the commercial property what types of businesses may be conducted in that municipality. Second, a buyer should review that municipalities business license requirements. Often, buyers assume that a business is zoned for their business without doing their due diligence and confirming this. Third, many businesses have been grandfathered into certain rules and regulations. Purchasing a new commercial property will void that grandfather status (in many cases). Often, a municipality will require the fire department to inspect the building for safety purposes. In these cases, the fire department will request certain modifications or improvements to meet the standards of that municipality’s business and safety standards.
According to Todd Survey, a land survey is the art and science of measuring and mapping of our surrounding environment using mathematics, specialized technology and equipment. Simply put, a commercial survey is paramount because it gives the buyer and their attorney boundary lines and informs about the land restrictions such as historical status, easement rights, and other considerations. Furthermore, a commercial survey informs the buyer and their attorney whether the property being sold is being sold without any constraints that the buyer is ill-informed about.
Land Trust for Commercial Ownership of Property
One strong consideration a commercial buyer should consider is whether to close in a Land Trust. Chicago Title Land Trust Company provides a frequently asked questions on their website. See https://www.ctlandtrust.com/faq.htm. A Land Trust is a way of keeping the ownership record of the property anonymous and prevents liens and judgments from attaching to the property subject to certain limitations. A Land Trust is an excellent asset protection strategy to protect a business owner’s liability concerns. A commercial buyer should contact their lender to see whether their lender will allow a commercial buyer to purchase their property in a Land Trust. Furthermore, a Land Trust provides simple estate planning unlike the typical real estate ownership of a property. A commercial buyer can describe who should inherit the property upon their death. A Land Trust should not be a substitute for estate planning and the use of a living trust, but it is a good first start. A Land Trust will provide basic estate planning until a business owner has the financial ability to do estate planning. A Land Trust is strongly recommended for a single buyer that is not married.
Generally, the Land Trust will have a trustee, which is Chicago Title Land Trust Company. The beneficial beneficiary will be the commercial buyer (or their LLC). A Land Trust Agreement will be required by Chicago Title Land Trust to accept their appointment as Trustee. The typical annual fees are minimum (around $250 and up) in annual maintenance fees. Special consideration must be considered to have the real estate taxes go to Chicago Title Land Trust Company or other entity to avoid the owners being disclosed by the real estate tax bills.
Generally, the Commercial Sales Contract sets a closing date where the Seller must (in many cases) provide a commercial survey, a title commitment, a bill of sale, and other specific items to the commercial buyer at closing. On the contrary, the commercial buyer must provide the financing to finalize the real estate closing such as wire transferring the funds.
In conclusion, Sean Robertson and Gateville Law Firm concentrate in commercial real estate, estate planning, business planning, and asset protection for business owners and commercial real estate property owners. Sean Robertson may be reached at 630-780-1034. Our website is www.GatevilleRealEstateLLC.com.