7/3/24

Commercial real estate tips from an attorney

 

Commercial real estate tips from an attorney

- Are you thinking about buying any commercial real estate? Check out this short video on the three tips to look out for before your first commercial deal. Hi, Barry here with the LawFull Channel. On this channel, you're gonna find short videos on the legal topics that affect your life. Like today's topic on commercial real estate property.

If you haven't subscribed to our channel, please do so and is you have any questions or comments, please feel free to reach out to me. If I can't help you, I'll find someone who can. So, many people wanna get into commercial real estate but they don't know where to start. So today I'm in downtown Chicago meeting with real estate attorney Junilla Sledziewski and we're gonna talk about commercial real estate a bit.

Junilla, what exactly is a commercial real estate deal?

- Sure, typically someone who's looking to get into commercial real estate will be purchasing a property for purposes of running a business out of that property or using it for investment. To be clear, I'm not talking about a residential purchase. For example, single-family home or a condo that you would be living in. A commercial property is something that is intended for a business. - So, for people who wanna get into commercial real estate, where do they start?

- Sure, you wanna start with a plan. I think the number one thing is to come up with a strategy overall for how this commercial property is going to fit into your life. You wanna think about how much you are going to spend on the property. Where the money to purchase the property will come from. For example, from a bank or another type of lender, maybe family or other investors.

You also wanna think about your exit strategy before you even get into it. When you purchase real estate, your cash is tied up and so you don't have that liquidity that some people may find that they need or want.

So you wanna think about how long you intend to hold the property before you sell and what other purposes it might be able to serve for you in the future. You also wanna assemble your teams. You'll need a real estate attorney, you'll need a commercial property broker.

You'll probably need an accountant, maybe even a financial advisor. So you wanna make sure you have your team lined up from the beginning. - On your website I was reading that you really suggest that people become familiar with the lingo associated with a commercial real estate deal. So, give me an example of what you're talking about. - Sure, Barry.

There's a lot of terms that we, who work in commercial real estate, throw around without even thinking about it. But if you're new to that business, you're going to hear things like net operating income, due diligence, triple net leases, and those terms can seem daunting at first, but they really just stand for pretty basic concepts. Net operating income just refers to how much income you're making from the property after you calculate your total revenue minus your allowable operating expenses. Due diligence is the process by which you would evaluate the property after you have chosen a property to purchase. You know, you're going to look at things like how much rent the property is producing in terms of how many tenants are there, what are the taxes each month for the property, are there any issues in terms of maybe liens on the property and things like that.

And then the final thing is going to be your triple net leases, so that, a triple net lease is essentially where your tenant in the property pays taxes, maintenance, and insurance in addition to rent.

Commercial real estate tips from an attorney

So, that's great for you as a landlord because the tenant will be paying those things on your behalf, but you just wanna understand before you sign to purchase a commercial property that maybe has tenants in it, what those tenants are responsible for versus what you are responsible for. - You know one of the things that you just said is that due diligence is really key to a commercial deal. Can you give us an example of how due diligence might come into play here? - Yeah, absolutely Barry.

So, say for example you're looking to purchase a strip mall and there are three stores in that strip mall and they're all occupied. Say for example, you have a tenant that is a nail salon, maybe a restaurant, and a clothing store. So, you're gonna wanna look at each of those tenants individually and make sure that they're a solid tenant, that their rent is enough to cover their portion of the expenses of the building plus, of course, leave something for profit.

Because that's the whole point isn't it? You also wanna look at the leases to see how long those tenants will be in the property.

For example, if one tenant is, their lease is expiring in a couple of months, you wanna know that, because either you're going to have to negotiate a renewal with them or you may need to find a new tenant. - When does due diligence come up? When do you do your due diligence? - Yeah, so typically for a commercial deal you will do a little bit before you go under contract for the property. But then once you go under contract, you're gonna have a period of time to do more of a deep dive into the financial health of the property, any title issues, and things like that.

So, the contract will dictate what that period of time is, but typically maybe 60 to 90 days would be normal.

Then once you've completed your due diligence and you're satisfied that the property meets your standards, then you would close the property and then you'd be the owner. But the one thing I wanna get across is anything can happen, so expect the unexpected. During that due diligence period, perhaps the roof caves in, or there's a fire, or the tenant moves out. These are things that can happen during your closing period or beyond so just be prepared for that.

Know that commercial property is complicated and there's a lot of things that can happen and you have to decide if this is for you. And if this property is going to work for you or not, and just move on. - Thank you very much Junilla, for working with us to understand some of the pitfalls of dealing in commercial property and also for doing this whole string of videos on real estate. The question for you, now it's time for your take on the law. Do you own commercial real estate?

What has your experience been? Did you deal with it with an attorney or without an attorney? Tell us about it in the comments below.

Hey, thank you for checking out this video. If you like what you saw, please consider subscribing to our channel.

And if you have any questions or comments about this or any other legal related matter, please reach out to me. If I can't help you, I'll find someone who can.

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