Commercial Real Estate Minefields

When a client came to attorney Oscar Rivera asking him to force a guy to sell him a hotel, Rivera was up a creek.

The problem: the client drew up his own contract to buy the property and then the seller changed his mind.

“It
was a horrible contract,” says Rivera, head of the real estate
department of Siegfried, Rivera, Lerner, De La Toree & Sobel, in
Coral Gables, Fla. Startups should hire an attorney before even looking for commercial property to buy or lease, he says.

“The
buyer wanted to see if we could default the seller and force them to
close. Had that contract been drafted better, he would’ve been in a
better position – as opposed to filing a lawsuit and spending $50,000
in legal fees when we don’t even know if we’re going to win,” Rivera
says.

This is a typical scenario in the world of
commercial real estate when companies don’t pull together the best team
to guide them through the process. Don’t stop at hiring a lawyer; find
a specialized broker, tax planner, engineer or licensed inspector and
environmental consultant to share expertise, help you find the right
property and ensure you claim it quickly and painlessly.

Learning lease lingo

Unlike
buying a home, almost anything goes in the world of commercial real
estate. Rivera warns that if you don’t negotiate, you’ll be taken for a
ride. “Everything is open to negotiation,” he says.

Attorney
Scott Jordan agrees. Commercial leases are short and often require
tenants to assume responsibility for repairs and maintenance to the
roof, air-conditioning, sewer systems and doors, he says. All those are
negotiable — if the roof needs to be replaced in five years and you’re
signing a 10-year contract, Jordan advises “obtaining a rent concession
from the landlord to cover the roof or negotiate out your
responsibility to repair it.”

In a commercial real
estate deal, “base rent payment” refers to a small portion of what
you’ll actually shell out, says Jordan, head commercial real estate
counsel with the Ft. Lauderdale law firm, Tripp Scott. You’ll also pay
taxes, rent increases and a percentage of general maintenance and other
bills.

Look for, and understand, these terms:

  • Actual minimum monthly base rent payment: This is just the start of what you’ll pay.
  • Percentage rent: Payments based on a percentage of your company’s revenue.
  • CAM : Common area maintenance expenses – usually associated with a shopping center.
  • Insurance: Wind/storm, flood zone, title insurance and more.
  • Real and personal property taxes , sales tax , and everyone’s favorite, late fees.

Also,
when you first visit the space, bring a tape measure to map out the
exact footage you’re going to lease, because commercial leases are
usually based on a per-square-foot number. If the landlord’s charging
you for 3,000 square feet, measure it yourself to know that’s what
you’re getting.

It’s not a home loan

While
you might mortgage your house at a fixed interest rate over a period of
30 years, banks don’t do that with commercial property. These loans are
more likely to be 10 years at the outside, but probably less.

And
many commercial loans require the head of the company to personally
guarantee the transaction, Rivera says. That means putting up company
assets as collateral for the loan.

No disclosures are
required in commercial transactions, as they are with home loans. But
many banks require an attorney to write an opinion letter, certifying
and assuming liability, and that your company is legit and has the
authority and ability to assume the loan, Rivera says. Those letters
can be very long.

Know the tricks of the commercial real estate trade

There
are some other things worth knowing about putting together a smart real
estate deal for your new business home. They could save you thousands
of dollars in the long run, so take the time to think through these
tips:

  • Investigate:
    You have 20-40 days after agreeing to buy or lease the property to
    check it out. Hire a certified inspector, look at business records and
    address environmental concerns.
  • Appraise :
    Even if you’re plunking down cash to buy a space for your business, get
    it appraised. You don’t want to overpay. (Banks typically lend about 75
    percent of the appraised value on an owner-occupied property.)
  • Not everybody’s green :
    Environmental consultants research the previous uses of a property. If
    there are, or were, underground storage tanks, they’ll test for
    contaminants. Think very hard before taking on a property that’s
    environmentally unsound.
  • Take ownership:
    Decide exactly who will own the property. Jordan advises creating a
    separate company to be the property owner, so if your business goes
    under, you’ll still have the real estate as an asset.
  • Do not disturb:
    Get a non-disturbance agreement from the bank if your landlord still
    has a mortgage on the property. This keeps you out of any of his
    snafus, such as foreclosure.

Listen to your experts’ advice, and follow these guidelines. Moving day isn’t the end of the deal, it’s just the beginning.

Lynne Meredith Schreiber is a freelance writer for StartupNation.

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StartupNation Writer

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