Most Common Pitfalls in Commercial Real Estate Deals to Be Aware Of
When you think of getting into a new business, there are always a few problems associated with it, and commercial real estate is not an exception. Most of the problems in commercial real estate transactions arise because of the over excitement and eagerness to get the transaction done as early as possible. You just have to slow down, give yourself enough time and carry out with all the due diligence you need to perform while mitigating the risks associated with it. Also, you need to know that it’s even more difficult to handle the problems that arise during the deal without a proper groundwork.
When the problem arises, it tempts us to just ignore assuming that they can be handled some time later. This is the most common mistake we usually do; some problems can’t just be handled once the deal gets closed. Of course, there are some issues that can be handled even after the deal closes, but often with greater risks and less satisfactory results. So, it’s always good to take a step back, examine the problem, discuss it with your lawyer and come to a conclusion. Here are a few common pitfalls that arise during the commercial real estate deals.
1. Property Valuation: Property valuation can sometimes become a problem in commercial real estate. Determining the value of a commercial property can be really difficult at times, as the property can be completely unique with no comparable sales available. Sometimes you’ll also have to consider the income component; if the property is associated with the income stream, it must be factored into the deal. The buyers and sellers getting into the transaction without knowing about it might face tough times later in the deal.
2. Fraud Deals: You must know that the buyers are responsible for all the due diligence to be carried out as they cannot rely on the consumer protection laws. So, they just have to be mindful with respect to fraud as there are no robust mechanisms that can protect them from fraud or provide them recourse if the deal goes bad. For instance, the disclosures that are afforded to the purchasers of residential property aren’t often available to the purchasers of a commercial property.
3. Overreaching: Overreaching can also be a problem for the buyers and sellers sometimes. Both the parties should be aware of the deals that would require more capital. But the thing is that, you need to realize it before the deal gets affected. It’s very important for you to preserve the memory of each and every possible detail of the deal, as it can be of a great help for you some time later. Many individuals involved in commercial real estate use standard contracts which don’t cover some unique contingencies; this can also be a problem over time.
4. Improper Planning: Commercial real estate deals can cause lots of problems if you fail to plan in prior and pay heed to details. For instance, lenders in commercial real estate often require estoppel certificates, non-disturbance, subordination and attornment agreements from a tenant when the building is being purchased or financed. Often this seems to be a troublesome detail when the parties are on the terms like interest rates and performing due diligence over a property, but if it is not planned and handled properly, it can delay the entire deal.
5. Environmental Risks: Commercial properties will also be associated with the environmental issues like the property that’s contaminated previously by a hazardous material can cost substantial amounts to the owner to clean up and expose them to the litigation. The environmental issues are usually not very evident when the transaction is happening; it can sometimes take years to discover the environmental issue caused by the previous owner. In such cases, current owner will be responsible for all the clean-up.
So, it’s really important for you to hire the experts to perform all the required due diligence before entering a commercial real estate transaction, as it can be very risky to enter without any prior knowledge or preparation. These are a few major pitfalls avoiding which you can be a successful with the commercial real estate deals.