Commercial real estate deals take longer to complete than buying or selling residential properties because the process is much more complex.
To begin with, there are more steps involved in commercial transactions than residential real estate, and each one takes more time. In residential real estate, the buyer has 10 to 14 days to conduct a home inspection and it can take 30 days to obtain a mortgage. By contrast, the inspection for a commercial real estate deal may take 60 to 90 days, while financing approvals can require 60 days or longer.
In addition to an extended time frame, many additional factors make closing a deal more complex.
- Environmental issues: Commercial real estate deals may involve environmental issues. The site may be polluted or may have been remediated. If a gas station had been on the land, for example, and had a leak that was cleaned up as well as it could be, the real estate broker will check the public record about the incident to make sure a buyer won’t face any liability. If there are wetlands on the site, it could affect the use of or expansion on the property.
- Zoning and codes: Another area that complicates commercial sales, purchases or leases is zoning. If a lawyer’s office is being sold or leased as a physician’s office, the property may have to be brought up to current zoning codes. The building may not be handicapped accessible — converting it for use as a physician’s office might mean adding an elevator, which would be expensive. Changes in building codes over time may also be a consideration.
- Taxes: Taxes may come into play. Under the U.S. Internal Revenue tax code, a 1031 tax exchange allows sellers of investment properties to defer capital gains taxes, but only if the proceeds from the sale are reinvested in another property within a certain time limit.
- Financing: Financing arrangements also are more complex and may encompass both the purchase price and cost of improvements.
- Sophisticated infrastructure: Commercial buildings have more sophisticated structures and systems, including air conditioning, compressed air for industrial uses, sprinkler systems and laboratory equipment. A sprinkler system may need an upgrade for the next commercial occupant, but that expense may not be covered in the purchase and sale agreement, an omission that could cost the buyer as much as $150,000.
- Business environment: The business environment in individual towns or cities, including the tax rate, whether the community is pro-business, and rising or declining economic trends, also can affect the process. Tax rates for commercial property differ widely across communities, so where you locate your business can have a dramatic effect on your finances.
Due diligence is key in a commercial deal, no matter its size or complexity. To avoid costly surprises, make sure you have experts to advise you on all aspects of building specifications, people who know the questions to ask, and where to find qualified contractors to help when necessary. Experienced commercial real estate brokers at NAI Glickman Kovago & Jacobs welcome any questions you may have. Feel free to give us a call or contact us online.