Commercial Real Estate Investing: I once read that if you were to take all real estate lawyers from Illinois to lay them down end to end on the equator – it’s a good idea to put them in the middle. That’s what I heard. What do you think it is?
I have previously written about the need to use due diligence when buying commercial real property. It is essential to research prior to Closing all the important aspects of the property that you are purchasing. It is crucial to evaluate every commercial real estate deal in the belief that, once Closing occurs, there’s no way back. The seller is now your property and has gone. If post-closing issues arise, Seller’s contractual representations and warranties could at worst, result in costly litigation. AVOID EMPTOR! “Let buyers beware!”
Being extra attentive when beginning a commercial real estate deal for you to “get the deal right” could help save thousands of dollars in the event that the deal fails. It’s similar to the Fram(r) oil filter catchy slogan in the 1970’s “You could pay me today – instead of paying me in the future”. In commercial real estate, however, “later” may be too late.
The purchase of commercial real estate is not like buying a house. It’s not. It’s not. It’s not.
In Illinois and other states, nearly every closing of residential property requires an attorney for the buyer as well as an attorney on behalf of the buyer. It is probably wise. It’s good for consumer protection.
The “problem” that this creates, however, is that each lawyer who handles commercial real estate believes themselves to be as a “real estate attorney” competent to handle any real estate deal that arises.
In law school, we learned that there are only two types of property which are real estate and personal property. So, we conclude that when we’re competent enough to manage the residential real estate closing it is essential that we are able to manage the commercial real estate closing. Each one is “real estate” isn’t it?
Answer Yes, they’re both real estate. They aren’t identical.
The legal risks and issues that arise in a commercial real estate transaction are vastly distinct from legal concerns and risks involved in residential real estate transactions. They are not even alike. Attorneys who concentrate their practice on residential closings of real estate are not faced with the same problems when they are attorneys who specialize in commercial real estate.
It’s a matter of the amount of experience. You either are aware of the risks and issues when dealing with commercial real estate and are able to manage these risks or not.
The most important thing to remember to keep in mind is that the multitude of consumer protection laws that cover residential home buyers do not have any application for – and offer no protection for purchasers of commercial real property.
Successful commercial real estate practices require an intensive and focused analysis of every aspect relevant to the purchase by someone who is aware of what they’re seeking. It is, in essence, the practice of “due diligence”.
It’s true that the practice of due diligence isn’t expensive, but failure to take due care can result in financial catastrophe to the real property investor. Don’t be “penny smart and penny foolish”.
If you’re looking to purchase the home of your dreams, make sure you employ an attorney who regularly represents buyers of homes. If you’re buying commercial properties, you should hire an attorney who is regularly representing the commercial buyers of real estate.
Since the end of my career, I have not handled commercial real estate deals for residential properties. As a seasoned commercial real estate attorney, I also employ the residential counsel of real estate to assist with my own purchase of homes. I do this because the practice of residential real estate is distinct in comparison to commercial real estate.
Maybe I “harp” about the importance of having a competent lawyer who is knowledgeable about the commercial property market. I truly believe in it. I am convinced that it is crucial. I think if you’re planning be invest in real estate for commercial purposes, you should utilize your critical thinking abilities and be savvy.
Pop Quiz: This is an easy test of your ability to think critically:
Please go through the following scenarios and answer the following questions, either TRUE or FALSE
Scenario No. 1: It’s Valentine’s Day. You’re on the lookout for the one you love dearly. In the past few weeks, she confessed to you that all she had ever imagined in the run-up to Valentine’s Day was that her partner would appear at her door in a white, tuxedo adorned with hair as well as a top hat and give her stunning bouquets of flowers. You’ve booked the tuxedo however, you’re now worried about how much you’re spending.
TRUE or FALSE: As flowers are basically identical, it’s okay to leave out the roses and instead show up with a bouquet of yellow dandelions.
Scenario No. 2. Over the course of several years, your eyesight has deteriorated to the point that you are unable to be able to see an alarm clock. You’re now thinking about opting for corrective surgery to ensure you don’t require glasses. Your mother-in-law underwent corrective eye surgery and saw amazing results. She suggests an eye surgeon, however, she states that the price is 5700 dollars for each eye, and the procedure isn’t insured by insurance. In the past, you underwent surgery to fix hemorrhoids. It cost only eight hundred dollars.
True or False: Because surgeons went into medical schools and all are medical professionals and are therefore frugal and smart by asking the surgeon who operated on your hemorrhoid operation to carry out the surgical correction for your eyes.
Scenario No. 3. Some time ago, before you were married, you requested an old classmate who now works as an attorney to be your lawyer in buying your townhouse. The price was just $375. One year after, you began your own family and decided that you’d like to take the help of a Will. The same attorney created Wills for both of you for a total price of $700. You launched your own company and your attorney friend incorporated the corporation on your behalf and took just $600 in addition to costs for the corporation’s minutes book. A few years later the time your child was detained for reckless driving infractions Your attorney friend took care of the criminal matter and got your son out of the jail with supervision at a cost of only $1500.
Your company has had a great run and you’ve built an impressive nest egg However, you’re exhausted from working for every cent and are looking to explore investing in real property. You’re eyeing an area that is a strip mall. It has a grocery store and a bank, a hardware store dry cleaners (on an ongoing month-to-month tenure), and a few fast food outlets, as well as a gift shop, bowling alley, dental office (with leases that is about to expire) and, is located behind mini-mart/gas station on the corner. The price of the purchase is $8 million however the net operating revenue appears to be quite good. If you convert this bowling alley into a full-service banquet and restaurant facility and also convert the dry cleaners into a 24 hours coin laundry The net operating revenue will grow and the mall could become a stunning investment. It is your plan to gather most of your savings and pay $2,000,000 to purchase the strip mall with the remainder of $6,000,000. You’ll remember how your lawyer friend was involved in purchasing your house many years ago, and you’re aware that he is a real estate lawyer.
True or false Real estate for commercial purposes is just like residential real estate it’s all dirt, isn’t it? (? )So you’re being a smart businessman by retaining your lawyer buddy who will be much cheaper than a lawyer who deals with shopping center purchases several times each year. What do you mean by the meaning of this “due diligence” matter?
If you said “TRUE” to any of the above Scenarios
The Quiz has ended.
You should find a peaceful area to reflect on your personal life and ask yourself if your decisions consistently will yield the results you’d like to see.
If you, however, you realize your answer to each of these questions is NO I’m available to assist you in Scenario No. 3.
For Scenario No. 2. You should follow the advice of your sister-in-law and consult her eye surgeon or any other eye doctor with the same expertise.
For Scenario No. 1, you’re entirely on your own. If you answered Yes to Scenario No. 1 you could be forever on your own.[But, if you answered TRUE for Scenario No. 1, you could be
The investment in commercial properties could be lucrative and rewarding – however, it requires good analytical skills and savvy guidance.
You’re blessed with a brain. It is highly recommended that you make use of it.
R. Kymn Harp is an experienced lawyer based within Chicago, Illinois with 30 years of experience in representing commercial real estate investors, lenders, and developers. He has been a frequent guest presenter in continuing education events and is a prolific author on industrial and commercial real estates issues, such as due diligence entitlements commercial real estate finance as well as Brownfield finance and development.