Commercial Real Estate Sales: Initial Considerations in the Purchase of Commercial Real Estate

The decision to purchase, lease, or sell commercial real estate is fraught with multiple challenges for both buyers and sellers. This series of posts will provide a basic understanding of the various aspects of transactions involving commercial real estate. This post will focus on initial considerations for buyers in purchasing commercial real estate.

Buy v. Lease

Real Estate CrisisThe first step in making a decision to acquire commercial real estate is to decide whether buying the property or leasing the property is more beneficial. Both transactions come with various risks and rewards, and both require a thorough understanding of the buyer’s needs, expectations and financial picture. Buying has drawbacks in that it tends to lock up liquidity, may compromise cash flows and ultimately subjects the buyer to the whim of various market forces. At the same time, buying has advantages over leasing if the buyer wants control of the property, wants specific tax benefits, or if land values are appreciating and property would be a suitable investment. Those who wish to forego maintenance issues, stay mobile and keep initial cash flow strong might consider a lease to be more beneficial. A way to make a determination in this area is to conduct a study of future net cash flows as a result of taking either option. Proper economic planning is essential to this determination.

Assembling the Team

A team of various experts is crucial to your decision to lease or purchase commercial real estate to ensure a smooth and beneficial transaction that best protects the buyer’s interests. These professionals operate in conjunction with each other to effectuate the transaction: a commercial realtor will work to identify potential properties; a lawyer will assist in determining whether legally the property is suited for the buyer’s intended use, as well as negotiate the sale and draft necessary documents; an accountant will analyze expenses and provide necessary financial guidance; and a mortgage broker will help secure financing.

It is especially important to consider what research needs to be done before a contract itself is actually drafted. Namely, it is essential to investigate or work with an attorney to investigate aspects of the property such as zoning, permissible uses, and existing restrictions, and then negotiate or draft a contract accordingly to make sure that the buyer gets or can get exactly what she or he wants and needs from the lease or the sale. An attorney will consider these existing factors to evaluate the short term and long term benefits and effects of a contract to lease or purchase to make sure the buyer is protected before he or she signs on the dotted line. Bringing an attorney in on the process earlier rather than later helps to ensure the buyer can maximize the benefits he or she will receive from the lease or purchase of their commercial property.

Start Shopping

There is plenty of work to be done in the actual consideration of specific properties for purchase. Thorough investigation and consideration of each potential site is key. Purchasers should visit multiple properties of varying types and create an ongoing list of the various pros and cons of each. The first consideration of any property is the old adage about the three most important aspects of real estate being “location, location, location.” Further, keep in mind the considerations mentioned above while you embark on your search and be sure to contact the attorneys at McBrayer when you need someone on your team.

Be sure to come back for the next post as this series continues to explore the elements of a commercial real estate sale.

BMacGregorBrittany MacGregor is an associate attorney practicing in the Lexington office of McBrayer, McGinnis, Leslie & Kirkland, PLLC. She is a graduate of Transylvania University and the University of Kentucky College of Law. Ms. MacGregor’s practice focuses on real estate law, including title examination, title insurance, clearing title issues, deeds, settlement statements, preparation of loan documentation, contract negotiation and preparation, and lease negotiation and preparation. She may be reached at bmacgregor@mmlk.com or at (859) 231-8780.

This article is intended as a summary of federal and state law activities and does not constitute legal advice.

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“Let It Snow, Let It Snow, Let It Snow…But Should Someone Else Be Clearing it?”

Winners, shopping in Calgary

Winter has made its early debut. The snow has begun falling and the salt trucks are already covering the roads (and our cars), and it’s not even December! Despite the bleak forecasts, people are out and about in large numbers, especially in light of the approaching holidays. With the snow comes the ice, and shopkeepers and property owners alike are getting their own shovels and salt stashes ready to clear their walkways and sidewalks for their customers and tenants. Along with the bad weather also come the questions regarding a property owner’s or lessee’s obligations to a tenant or customer to create a safe, and ice or snow free, place to come and go. It’s best to have a plan of action with regard to your property before the bad weather hits and understand your duties to those visiting your property during the winter season. If you’re a landlord, business owner or retail lessee, consider the following:

Landlord/Tenant Obligations

Generally, a landlord has a duty to exercise reasonable care to keep common areas held in the landlord’s control in a safe condition for their tenants, as well as recognize changing conditions and remedy them as they arise. This is especially an issue when the weather turns for the worse. Landlords need to be aware of potential issues as the snow and ice starts to accumulate, keeping on hand the proper materials to keep the walkways clear and safe and be cognizant of problems as they arise so they are fixed in a reasonable manner and within reasonable time.

Business Owners/Lessees

For tenants leasing a retail space, it is important to first look to your retail lease to determine exactly who is obligated, if anyone, to clear and salt the walkways and storefront in bad weather such as snow and ice. If your business or property sits on a municipality owned walkway or roadway, look to your city ordinances to determine whose obligation this may be in inclement weather. Determining whose responsibility it is to take action when winter hits is the first step in preventing injuries on your premises as well as liability for yourself or your business. Whether you’re a retail landlord or tenant, consider whether you need to incorporate language into your lease that speaks to duties with regard to snow and ice if these obligations are not clear.

If your business, like many others, clears and salts its sidewalks and parking lots to encourage people to come in despite the wintery conditions, it is important to have a consistent policy in keeping your premises clear and as safe as possible. With a change in Kentucky law over the last 5 years, even if it is obvious to your customers that weather is poor and the sidewalks slick, the entity occupying the property could still face liability if it doesn’t ensure the care towards its premises is reasonable under the circumstances.

By addressing these potential issues early, landlords, business owners and lessee’s can reduce the possibility of incidents on their premises and injuries to their customers or tenants during the winter season. If you are a landlord, retail owner or tenant and have questions about your obligations, contact the attorneys at McBrayer today.

BMacGregor

Brittany MacGregor is an associate attorney practicing in the Lexington office of McBrayer, McGinnis, Leslie & Kirkland, PLLC. She is a graduate of Transylvania University and the University of Kentucky College of Law. Ms. MacGregor’s practice focuses on real estate law, including title examination, title insurance, clearing title issues, deeds, settlement statements, preparation of loan documentation, contract negotiation and preparation, and lease negotiation and preparation. She may be reached at bmacgregor@mmlk.com or at (859) 231-8780.

This article is intended as a summary of federal and state law activities and does not constitute legal advice.

‘Tis The Season To Think About Your Retail Lease

With November nearly upon us, the holiday shopping season is right around the corner. For retailers, the peak season can bring a whole host of issues to be considered in connection with a commercial lease. The best time to think about these issues is now – before the droves of eager customers start lining up at the doors. So, if you are a retailer and lease a space for your business, take a few minutes and consider the following:

  1. Does your lease require that you only operate during certain hours, preventing you from participating in “Black Friday” or staying open late during especially busy days?
  2. Is there available parking for seasonal employees?
  3. Are there any limitations in the lease about the type of signage or decorations? Must signs or decorations be approved by a landlord?
  4. Are there any provisions prohibiting special activities in or around the store (i.e., having carolers, a gift wrapping station, or passing out hot chocolate to bystanders)?
  5. If you are in a multi-unit building, how will advertising and general maintenance costs be divided? In other words, who is really paying for Santa and his elves to be stationed in the center?

Shopping Christmas Santa

By addressing these issues early, landlords and tenants can reduce the possibility of misunderstandings and disputes during the shopping season. A little forethought and communication can go a long way in making everything merry and bright. If you are a landlord or tenant and have questions about your commercial lease, contact the attorneys at McBrayer today.

CRichardson

Christopher A. Richardson is an associate at McBrayer, McGinnis, Leslie & Kirkland, PLLC in the Louisville, KY office. Mr. Richardson concentrates primarily in real estate, where he is experienced in residential and commercial closing transactions, landlord/tenant relations, and mortgage lien enforcement/foreclosure. Mr. Richardson has closed innumerable secondary market and portfolio residential real estate transactions and his commercial practice ranges from short-term collateralized financing and construction lending to development revolving lines of credit. He can be reached at 502-327-5400 or crichardson@mmlk.com.

This article is intended as a summary of  federal and state law and does not constitute legal advice.

Why Use an Exclusive Use Clause?

If you are a business owner and in the process of negotiating the terms of your commercial lease, you will want to be sure to include an exclusive use clause to the document and negotiate the terms with the landlord. Exclusive use clauses are intended to protect a tenant’s business by ensuring that the named tenant is the only tenant in a particular shopping center that can sell or offer to sell specific products or services. In some cases (generally, where a tenant has more bargaining power), an exclusive use clause may extend to any other properties owned by the landlord or an affiliate of the landlord within a certain radius.

The scope of the exclusive clause greatly depends on the nature of the business. Narrowly-focused businesses can be served with narrow clauses; however, if a business offers a wide scope of products or services, then the clause will have to be carefully considered by both parties. For instance, a national retailer that sells coffee for on-site consumption may have an interest in protecting against another store selling any kind of hot beverage, even though it only derives minimal profit from its hot tea and hot chocolate sales. A clause that prohibited another store from selling any hot beverage would significantly restrict the landlord’s options for possible tenants. Bookstores that offer hot chocolate or even a gas station that offers self-serve coffee would be prohibited from leasing in the same retail space even though these places are not in direct competition with the coffee chain. Landlords will be reluctant to restrict its other spaces from ancillary uses that do not directly pose a threat to the tenant’s primary business.

A landlord and tenant could reach a compromise when it comes to the scenario above by agreeing to place a capped amount on the sales that another tenant may derive from the ancillary uses of the negotiating tenant (i.e., the sale of hot beverages). Alternatively, the parties could agree to restrictions on advertising or display areas that other tenants would have to abide by if leasing the space. When it comes to exclusive use clauses, there are several ways to help both landlord and tenant strike the right bargain. A well-drafted clause offers the tenant adequate protection from competition without stifling the landlord’s ability to attract other compatible businesses for the retail area.

If you are considering entering into a commercial lease and need assistance in reviewing or drafting provisions, contact a McBrayer real estate attorney today.

CRichardson

Christopher A. Richardson is an associate at McBrayer, McGinnis, Leslie & Kirkland, PLLC in the Louisville, KY office. Mr. Richardson concentrates primarily in real estate, where he is experienced in residential and commercial closing transactions, landlord/tenant relations, and mortgage lien enforcement/foreclosure. Mr. Richardson has closed innumerable secondary market and portfolio residential real estate transactions and his commercial practice ranges from short-term collateralized financing and construction lending to development revolving lines of credit. He can be reached at 502-327-5400 or crichardson@mmlk.com.

This article is intended as a summary of  federal and state law and does not constitute legal advice.