Question:
I am an experienced Residential Real Estate Agent, and I have the opportunity to represent a buyer on the purchase of a small commercial strip mall. What are some differences between residential and commercial properties?
Answer:
I recently participated on a panel to discuss just this topic, with residential agents. There are many differences between residential and commercial transactions, and I will highlight just a few:
ENTITIES
Buyers and/or Sellers are much more likely to hold title to properties in some type of entity, such as a Corporation or Limited Liability Company (LLC). This is why a purchase agreement for commercial real estate will list the buyer(s) as individuals but include “and/or assignee.” There will be requirements in escrow for the use of entities, refer to my earlier article: https://glenoaksescrow.com/ask-cynthia-entities-in-escrow/
DUE DILIGENCE
“Due diligence” is a term commonly used in commercial transactions for the buyer’s investigations of the property during their contingency period. Commercial transactions (including residential over four units) are not subject to the same level of disclosure requirements that are required on residential transactions. Someone referred to due diligence during a commercial transaction as “a home inspection, on steroids.” The buyer will conduct due diligence to determine the suitability of the property as an investment.
ENVIRONMENTAL REPORTS
This is an item often required by a lender, but it is highly recommended that even a cash buyer include environmental concerns as part of their due diligence. There is a significant liability to owners of property containing environmental contamination. The Phase One Report details the historical uses of the property to determine the risk of contamination, along with the results of a site inspection, and other matters related to environmental issues. If the Phase One Report includes issues of potential concern, it then goes to a Phase Two Report, which might include things like the testing of soil samples, etc., to determine if any contamination is present. The Phase Two Report will make recommendations for the “remediation” of the contamination. Remediation may include things like digging up and removing underground storage tanks, etc.
LEASES AND TENANT ESTOPPELS
Buyers will typically ask for and review any current leases with existing tenants. The review of leases may include determining the amount of rent when it is due, and if and when rent can be increased. I may also show which parts on the property are the tenant’s responsibility and which are the landlord’s. A “tenant estoppel” is a survey, completed and signed by the tenant, confirming the tenant’s understanding of the lease terms.
LENDING REQUIREMENTS
Lenders on commercial transactions will be interested in the income and expenses of the property when it is tenant occupied. This may include a review of existing lease agreements, tenant estoppels, and financial statements from the seller, which could include tax returns. This means that there needs to be a high level of cooperation between the buyer and seller, in order to “qualify” the property for a commercial loan.
As you can imagine, the differences between residential and commercial real estate are far more than what I have described here. Representing owners and buyers of commercial real estate is definitely a specialty. If you are planning to make this a regular part of your real estate sales business, you may want to attend classes and seminars on the topic. I have seen many residential agents successfully make the transition to commercial. Keep in mind in your first transactions that “you don’t know what you don’t know.” Arming yourself with knowledge will go a long way to protect you and your client from potential pitfalls.
I recently participated on a panel to discuss just this topic, with residential agents. There are many differences between residential and commercial transactions, and I will highlight just a few:
As you can imagine, the differences between residential and commercial real estate are far more than what I have described here. Representing owners and buyers of commercial real estate is a specialty. If you are planning to make this a regular part of your real estate sales business, you may want to attend classes and seminars on the topic.
I have seen many residential agents successfully make the transition to commercial. Keep in mind in your first transactions that “you don’t know what you don’t know.” Arming yourself with knowledge will go a long way to protect you and your client from potential pitfalls.
I hope the information has been helpful! And, remember, we are here to help in any way we possibly can. So, don’t hesitate to reach out if we can be of assistance.
Cynthia Moller
661.362.0400
cmoller@glenoaksescrow.com
