Buying Commercial Real Estate

Commercial property isn’t like buying a home. The stakes are higher, the contracts are longer, and the fine print is more complex.

Some Essential Things to Note

1.      Location, Demand, and Accessibility: Location is still one of the biggest factors to consider when investing in commercial property. But it’s more than just being near a main road or transport hub. Accessibility and visibility are crucial for value; examine local market trends, population growth, nearby amenities like parking, and future development plans.

2.      Due Diligence: This process is longer and more expensive than residential, often requiring inspections, environmental reports, and legal checks.

3.      Property Condition: Are you buying a new building, or has it been around for a while? Either way, you’ll want to take a close look at its structure, facilities, and maintenance history before making a decision. Here are a few questions to ask yourself:

·         Does it need any major repairs soon?

·         Will you have to upgrade things like plumbing, electrical, or HVAC?

·         Is it ready for tenants to move in, or will it need some work first?

Tip: Sometimes, a lower purchase price on an older building can be tempting, but the cost of repairs and upgrades can quickly add up. What looks like a bargain now could end up eating into your investment returns later.

4.      Financing and Costs: Be prepared for higher down payments and interest rates. Budget for ongoing costs like property taxes, insurance, and maintenance.

5.      Zoning and Property Usage: Confirm the property’s zoning allows your intended use and investigate future development plans.

6.      Lease Terms and Tenants: Do you want to assume the existing tenants? If yes, analyze the rent roll, lease types, and tenant stability. Here’s what you need to look at when reviewing lease terms:

·         How long are the current leases?

·         Who’s responsible for outgoings like maintenance, insurance, property tax?

·         Are the commercial tenants financially stable and reliable?

Tip: Don’t skip the due diligence. Check your tenants’ backgrounds, payment history, and overall business health, and whether they have had issues in the past.

7. Potential Yield

One of the main reasons investors turn to commercial real estate is the potential for higher rental yields compared to residential property. But commercial properties deliver different returns, and your yield can vary widely depending on your property type, location, and current market demand.

That’s why it’s important to crunch the numbers early on:

·         What’s the projected annual rental income?

·         What outgoings do you need to cover?

·         How does that stack up against the purchase price?

Doing the math upfront gives you a clearer picture of the property’s potential yield and helps you avoid jumping into an investment that will not meet your expectations.

8. Free from Property Litigation

This is non-negotiable. Before you sign anything, make sure the property doesn’t come with any legal baggage. Check for any ongoing disputes, legal claims, ownership issues, or unpaid taxes involving the property.

The last thing you want is to invest a huge amount only to find yourself tangled in someone else’s legal mess. A thorough title and legal check now can save you a lot of time, stress, and money later.

9. Budget and Terms of Sale

When it comes to buying commercial real estate, factoring in the purchase price is just one piece of the puzzle. To get the full picture, make sure you’ve accounted for all the extra costs that come with the transaction, like:

·         Legal and conveyancing fees

·         Valuation and inspection reports

·         Any potential repairs and upgrades

Having a clear and realistic budget from the start helps you avoid surprises and makes sure that the property aligns with your investment goals.

10. Contract Review: Before you sign on the dotted line, engage your lawyer to review the contract to confirm things like:

·         Whether the seller has good title, free and clear?

·         Are there any special conditions or clauses you need to be aware of?

·         What is included or excluded from the sale?

·         Does the contract allow for sufficient time to obtain Financing?

·         What due diligence periods are provided and what disclosure obligations are expected during that period?

·         Are there existing leases or other contracts to be inherited?

·         What termination provisions are included?

·         Are there adequate representations, warranties and remedies for breach of contract?

Taking the time to go through these essentials and getting the right lawyers on board gives you the best shot at making smart contract negotiation and ensuring effective closing.

At Galbraith Law, our real estate lawyers can help you navigate the process and minimize risks. We know the relevant legislation and can advise you on all aspects of your transaction, from reviewing the contract to ensuring all the paperwork is in order for smooth closing.