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
The 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.
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.
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 firstname.lastname@example.org or at (859) 231-8780.
This article is intended as a summary of federal and state law activities and does not constitute legal advice.