Guest post by Frank Simon
Imagine these scenarios:
#1: A commercial real estate opportunity comes your way. The property is fully leased – as it has been for years — including a major retail outlet as its anchor. You bid, you buy and the property is yours to collect rents and make a profit on. Except that major tenant on which you were banking? It has decided to leave, and now your property is immediately worth less than half of your purchase price.
#2. You buy a property to house a particular kind of business only to find out after purchase that the property zoning disallows the kind of business you envisioned for the property. Now you are left scrambling to either unload the property or reinvent your entire business plan.
#3. You have taken over a building and are charging tenants for Common Area Maintenance (CAM), such as snow removal and heating-unit repairs. But somehow the fees aren’t covering your expenses. This is slowly eating away at your profit margin.
Unfortunately, I have seen the above situations happen too many times to both seasoned and novice real estate investors. The culprit is non-existent or poor legal counsel. Successful real estate investors know – sometimes by experiencing one of the above scenarios – that the right legal counsel is needed at the start and throughout the entire real estate purchase process. It can be the difference between buying a property that will provide you steady income or an albatross that is difficult to sell and depletes your resources.
You can’t be too careful, and your attorney can’t be in place too early in the process. Your attorney should be the one drafting your letter of intent and then your purchase agreement. An attorney is crucial for the due diligence period. Some of the areas in a real estate transaction that require real estate law expertise:
- Title work
- Escrow account
- Environmental issues
When hiring an attorney to help you navigate the legal waters of a real estate transaction, look for attorneys with experience in real estate law specifically. Ask the attorney or firm how many transactions they have done. It’s important that you hire someone with specific expertise in purchases agreements and title work and all the other intricacies of real estate law. I have seen the scenarios I described at the beginning of this article happen even when there was legal counsel in place. It just wasn’t the right kind of counsel. Don’t think that your tax or personal injury attorney can pinch-hit in these transactions. That kind of thinking can end up costing you more than legal fees.
One of the major areas of real estate transactions that can turn into major headaches for investors is the lease. This is an area where a good real estate attorney will be able delve in and figure out what is really going on with the property, especially to determine if there are termination clauses in a lease. This is very important because many times buyers assume they have a major tenant locked in, when in fact their termination clause gives them the right to pack up and leave under certain circumstances. If you bought what you envisioned as a lucrative property with a Walmart as a tenant and it can and does get out of its lease upon your purchase, your property went from potentially very profitable to worthless almost immediately.
Another area that can trip up investors is CAM. If you are able to charge tenants for this maintenance, a good real estate attorney can help figure out what the fees need to be. When the wrong calculations are done, it can cost you money: Too low, and it doesn’t cover your expenses. Too high, and it will cost you potential tenants.
Other issues that can turn out to be bad surprises if not investigated properly are in the areas of zoning and environmental issues. You certainly want to make sure you understand how your property is zoned and if that fits your plans. It is also imperative you understand what, and the extent of, any environmental issues before purchase. It you find out afterwards, those issues are yours and can be costly.
The rule of thumb regarding real estate and the law is to hire the right attorney right away. It can be the difference between owning a profitable commercial property and a white elephant.
Frank Simon is the founder and managing partner of Simon PLC Attorneys & Counselors of Bloomfield Hills, Michigan. Simon is a licensed real estate broker and holds an additional graduate degree in banking. In addition to its Michigan headquarters, Simon PLC has offices in Arizona, Illinois, Florida, New York, Ohio and Texas. For more information visit www.simonattys.com.