How complex are commercial real estate transactions?

On Behalf of | May 26, 2021 | Real estate litigation |

Commercial real estate transactions in Ohio can encounter complexities that make them very different from the purchase or sale of a home. Whether it is for an expansion of current operations or the initial plunge of a new startup, it is important to know the steps necessary to minimize risk before starting the process.

Not only is proper due diligence essential, which can be lengthy, there are also risks when the client is not aware of state laws or local ordinances, or does not consider liability or other considerations before negotiations start. Business owners who are entering the real estate market can benefit from an attentive review of all transactional aspects of the deal by experienced legal professionals serving Toledo and northwest Ohio.

The initial agreement and due diligence

In commercial real estate, every step of the way has considerations unique to each party that may require negotiations. The preliminary agreement between buyer and seller is usually memorialized in a letter of intent (LOI) or term sheet naming the parties in the deal and outlining their intentions. There may also be specific considerations in the LOI which will also be included in the formal agreement.

Due diligence, which can be quite extensive, is essential for investigating any issues with the property or financing sources such as:

  • Title and survey
  • Service contracts, management agreements or leases
  • Engineering and environmental factors
  • Compliance with use and zoning regulations

Negotiating the terms

Negotiating the terms and conditions of the purchase and sale agreement will guarantee a satisfactory outcome for both sides. The elements typically covered in this phase are:

  • Representations and warranties, which lay out the risk factors and clarify liability and indemnification obligations if there are representation inaccuracies, or if the warranties are breached
  • Covenants, which establish obligations for maintenance and repair, maintenance of insurance, and release of seller to enter into new contracts
  • Closing conditions, which set the conditions for the buyer to acquire the property, to be able to finance the purchase, as well as contingencies for use
  • Prorations and credits

Every transaction has unique issues that can be affected by industry-specific considerations, local ordinances, the financing sources chosen and many other factors. Knowing what lies ahead will help the business owner to prepare for potential risk and clarify their goals at the beginning.