5 Hidden Land Mines in Commercial Real Estate Deals

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Land mines are generally buried beneath the surface so that the unwary happens upon them and before they can react, BOOM! A significant amount of damage is inflicted upon the unsuspecting.

Similar "land mines" can exist within a commercial real estate deal. Although bodily injury may be avoided, the fall out created is nonetheless painful. Its important to recognize where these land mines might be hiding.

So, let's discuss the most common land mines you will encounter when buying or selling a building.

Environmental. Generally, buying a building includes borrowing money. An environmental assessment will be a part of your loan approval. Unseen, but lurking under the soli may be environmental contamination. An examination of current and previous uses of the building along with a review of local and regional conditions is undertaken to determine if any sub surface testing is recommended. If there is cause for concern, soil borings are collected, tested and a course of action pursued. Based upon the findings, your deal may be delayed or completely derailed. 

Entity status. Typically, ownership of commercial real estate is vested in an entity other than an individual. Most common among ownership entities is the limited liability company, or LLC. In order for the LLC to conduct business - i.e. sell real estate - the entity must be active in the state in which the entity operates. All tax returns must be current, and taxes - if any - paid. The entity must pay its annual filing fees. And, a statement of information must be on record with the state. If any of these boxes are unchecked, the entity may be suspended. A laborious process to revive the LLC must be undertaken. Searching in Corporation Wiki or the Secretary of State should tell you the status of your entity. 

Loan re-conveyance. When a loan is paid in full, a re-conveyance is necessary. Otherwise, the loan balance will still be recorded against the property. Owners incorrectly assume once the loan is paid, they are done. Wrong. Re-conveyances are easy to accomplish at the time the loan is satisfied. Not so easy if attempted years later. 

Clouds on Title. Mechanics liens, tax liens, Lis pendens - nasty little critters that prevent a seller from deeding property. Frequently, sellers of commercial real estate are clueless about matters affecting the title of their property. Before considering selling a building, its best to order a preliminary title report and have your title officer review it with you. 

Insurance. Your purchase will require insurance. Get your insurance professionals working on binding a policy early in your escrow. If you wait until you're at the closing table, the process will screech to a halt until this condition is fulfilled.