Commercial Real Estate FAQs

If I hire a real estate broker, why do I need to hire a lawyer?

If you have a broker, you still need an experienced commercial real estate attorney to protect your interests. The Texas Real Estate Commission that governs real estate contracts specifically prohibits real estate agents from giving legal advice, and states in the contract the buyers and sellers sign, “Consult an attorney before signing the contact.” Additionally, brokers don’t get paid unless the sale closes. Attorneys are objective. The attorney’s job is to protect you in the earnest money contract for due diligence and represent you at closing. Hiring an attorney on the front end of the deal could save a client from hiring a trial attorney on the back end of the deal when there is a serious problem, costing much higher fees.

What exactly is commercial real estate?

Broadly defined, the term “commercial real estate” applies to real property being used for business purposes. It could involve buying or selling retail properties, rental houses, industrial properties, or raw land. “Commercial real estate” also applies when selling real property along with and as part of the sale of a business. It might be industrial or agricultural property.

What are common risks in buying commercial real estate?

Commercial property may have all kinds of liens, easement and access issues, and title problems. There may be greater concerns about hazardous materials or zoning issues. Also, there will always be questions about the suitability of the property’s location for your business needs. Furthermore, in many instances, you aren’t afforded the same consumer protections on a commercial real estate transaction that may be available when you purchase a residence.

Does title insurance guarantee perfect title?

No, title insurance is nothing more than an insurance policy that provides good and marketable title to the property being insured. However, this does not mean that title insurance guarantees perfect title. As with all insurance, there are a number of different types of policies and endorsements. There are also many exceptions to title, which all tie back into information in the preliminary title commitment. These include specific exceptions listed on the property to be insured. Specifically, items listed in Exhibit B of the title commitment are pre-existing matters on the property that the title company is not insuring. The title company lists things on Schedule B to shift the burden of those problems to the buyer. Examples of items listed in Schedule B include: easements, restrictions, mineral drilling, boundary disputes and mineral or farm leases.

One standard exception, for example, is that the insurance will only be provided for exceptions to title that are reflected by the public records. Unless a special endorsement is obtained, there’s no obligation on the insurance company to insure against defects in title that would have been apparent from surveying or otherwise physically inspecting the property.

There are also different types of policies. For example, it’s customary for a seller to pay for standard coverage for the buyer that insures that the deed from the seller is conveying the title that it purports to convey, subject to exceptions in the title report. If a buyer wants additional protection against third party claims, the buyer can purchase an owner’s policy. If a loan is involved, a lender’s policy will be required that specifically insures the lender’s loan and lien position.

Should I buy commercial property with a company I own rather than personally?

There are many issues that can arise with respect to how you take title to property, and especially so in a commercial context. If you take title as an individual, you may be exposing yourself to potential liability exposure for anything, including injuries that occur on the property. In order to avoid those liabilities, it is common for purchasers to form an LLC to purchase and own the property. Badeaux & Associates will form an LLC for you. Learn more on our business law services page.

What is a “1031 exchange”?

A “1031 exchange” refers to a method of deferring tax on the sale of an interest in real property allowed under section 1031 of the Internal Revenue Code. In brief, it allows a seller to defer tax on a gain that would otherwise be realized on a sale of property if the proceeds from the sale were reinvested in like-kind property. It’s quite common for a 1031 exchange to be involved in some manner in a commercial real estate transaction.

A seller must contractually arrange to convey his or her interest in the property being sold in exchange for receiving an interest in another piece of commercial property. The rules for a 1031 exchange can be quite complex and it is easy for a seller to run afoul of them. It’s always advisable to have an experienced CPA and legal counsel involved in the transaction.

Our attorneys handle commercial real estate matters throughout Texas. Please call (281) 486-4737 or contact us online to find out how we can help you!

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