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Common Pitfalls of Commercial Real Estate Transactions

Entering into a commercial real estate transaction can be risky business.  Considerations necessary prior to getting involved with a commercial real estate transaction are different in many respects from those in a residential real estate transaction and often times more complex.  There are many pitfalls to avoid when considering buying or selling commercial real estate due to the high stakes often involved.

Property valuation can become a problem in a commercial real estate transaction.  Determining the value of commercial real estate is difficult because the property might be completely unique without any comparable sales.  Often, there is also an income component to consider.  If the property has an income stream that has to be factored into the deal.

Commercial real estate can also be subject to fierce negotiations.  Buyers are responsible for doing their due diligence in these transactions because they cannot rely on consumer protection laws.  Buyers have to be mindful at the outset that outside of fraud, there are no robust legal mechanisms to protect them or provide recourse if the deal goes bad.  For example, the mandatory disclosures afforded to residential purchasers are often not available to purchasers of commercial real estate.

Over-reaching can also be a major problem for buyers and sellers.  Parties involved should be wary of deals that are likely to require more capital or expertise then they currently possess.  But, the key is to realize when you are in too deep before the deal if affected.

It is crucial to memorialize every detail possible in the commercial real estate contract.  Since courts usually only consider the four corners of a contract in order to settle disputes, all critical details of the deal should be covered in the contract.  Too many individuals involved in commercial real estate use standard contracts that do not cover the unique contingencies that only exist in these types of transactions.

Lastly, it is important to consider environmental risks relating to commercial real estate transactions.  Properties with environmental issues, such as those previously contaminated by hazardous material can cost their owners substantial sums in cleanup and even expose them to litigation. These environmental issues are not always readily apparent when the transaction is taking place.  It could take years to discover that there is an environmental issue with the property caused by a previous owner.  At that point, the current owner may be primarily responsible for the cleanup, which can be a substantial unexpected cost.  Hence it’s important to hire experts to perform thorough legal and business due diligence prior to entering a commercial real estate transaction.

For information regarding commercial real estate transactions contact Harras Bloom & Archer LLP at our Melville, Long Island office at 631-393-6220 or our New York City office at 212-922-9545.


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