For the business owner planning to buy commercial real estate, whether as part of an expansion or in the initial plunge, it is wise to get the scoop on the complex and sometimes lengthy nature of the process. As it turns out, a commercial real estate purchase and sale is not at all like buying or selling a home.
Along with the necessity of proper due diligence in examining title and inspection, there are risks to entering into commercial real estate transactions if the client not aware of state laws or local ordinances, or is not familiar with some of the terminology used in such transactions. It is essential for a business owner entering the metropolitan Atlanta real estate market to seek knowledgeable legal counsel to make sure the contract they are entering into truly serves their needs.
Initial agreement and due diligence in purchase and sale agreements
The process for buying or selling commercial real estate usually goes through a certain order of steps, each of which may involve unique considerations and negotiations. The preliminary agreement between buyer and seller is usually memorialized with a letter of intent (LOI) or a term sheet, which identifies the parties involved and usually outlines their intentions. They will sometimes include specific provisions that will be included in the formal agreement.
The due diligence period is essential for investigating several important elements:
- Title and survey
- Service contracts, management agreements or leases
- Engineering and environmental factors
- Compliance with use and zoning regulations
Negotiating the terms
As part of the formation of the purchase and sale agreement, both sides will negotiate the terms and conditions that will give them a satisfactory outcome. The elements typically negotiated in this phase are:
- Representations and warranties, which serve both purchaser and seller in laying out risk factors as well as clarifying liability and indemnification obligations if there are representation inaccuracies, or if warranties are breached.
- Covenants, which establish obligations for maintenance and repair, maintaining insurance, and release of seller to enter into new contracts.
- Closing conditions, which set the conditions for the buyer to acquire the property, to be able to finance the purchase as well as contingencies for use.
- Prorations and credits.
Every transaction has unique issues that can be affected by industry-specific considerations, local laws, financing sources and many other factors. Understanding the process will prepare the business owner for potential risk and clarify their goals from the outset.
