The Ins and Outs of Buying a Commercial Property
The Ins and Outs of Buying a Commercial Property

Whether you are an experienced investor or a new and inexperienced investor, understanding the ins and outs of buying a commercial property is crucial to ensure a successful investment. Beyond the basic necessity of location, the process encompasses a multitude of factors, including market trends, financing options, property valuation, environmental concerns, zoning implications, future use implications and other legal considerations.

This intricate labyrinth of decisions requires not just cursory knowledge, but a deep understanding and strategic foresight. Undoubtedly, the stakes are high, but the potential for substantial financial returns and long-term growth can make the challenge worthwhile.

So, let us delve into the intricate matrix of commercial property acquisition, and uncover the key strategies that can transform this complex task into a profitable endeavor.

Understanding Financing Options for Commercial Real Estate

Financing the purchase of commercial properties involves numerous options beyond traditional bank loans. Explore the following financing possibilities:

1. Conventional Bank Loans: Traditional loans from banks usually require a substantial down payment, good credit and financial history. They often provide competitive interest rates and flexible terms.

2. Canada Small Business Financing Program (CSBFP): The CSBFP assists small businesses in accessing loans by sharing the risk with lenders. Eligible businesses can obtain up to $1 million in financing for purchasing or improving real property and equipment.

3. Private Lenders: Private lending is an alternative to conventional bank loans and can offer quicker processing and more flexible terms. However, interest rates are typically higher.

4. Seller Financing: In this financing option, the seller extends a loan to the buyer for the property, with the property serving as collateral. This arrangement can benefit both parties, especially if the buyer has difficulty obtaining traditional financing. In the first quarter of 2024 seller financing or more commonly known as Vendor Take Back (VTB) financing has become more common place.

Conducting Due Diligence During the Purchasing Process

Performing due diligence is essential in commercial property acquisition to uncover potential risks and ensure you make informed decisions. When conducting due diligence, pay attention to the following:

1. Property Inspection: Engage qualified professionals to inspect the property thoroughly. Inspections help identify structural and/or other material defects, assess compliance with building codes and zoning regulations, and identify required remediation or repair measures that may be required.

2. Legal Review: Review existing leases, contracts, permits, work orders, deficiency notices, environmental compliance and/or violations and other legal documents related to the property. Ensure that the property’s use complies with applicable zoning bylaws and obtain any necessary permits before the transaction.

3. Financial Analysis: Examine property financial statements, taxes, and operating expenses to gain a comprehensive understanding of the property’s financial health.

4. Title Investigation: Complete a title search and off title search for commercial properties is critical to ensure your investment is protected. The purchase of commercial title insurance to protect against any potential claims against the property is also a vital part of completing the transaction.

Navigating the Legal Complexities of Commercial Real Estate Transactions

Commercial real estate transactions involve intricate legal processes, with several factors to consider:

1. Purchase Agreement: The purchase agreement is instrumental in outlining the terms and conditions of the transaction, including the due diligence conditions, the representations and warranties that the seller is prepared to provide, review of lease agreements, financing conditions, and other similar matters.

2. Identifying the Purchaser: In commercial real estate transactions, the purchaser is usually a corporation, and that corporation is typically a shell corporation that does not own any assets. Sophisticated investors that own multiple properties/assets will not want to expose their assets to a law suit in the event the transaction fails to close or other challenges arise in the course of the transaction.    

3. Financing and Security documentation: The Mortgagee and/or Vendor’s lawyer will typically be responsible for drafting the financing and security documentation to ensure the rights of the mortgagee and/or Vendor are properly protected. From a Vendor’s perspective the lawyer acting for the Vendor will want more security and rights in order to protect its client’s interest. The lawyer acting for the Purchaser will want to limit the rights being granted to the mortgagee and/or Vendor if they are securing financing from the Vendor and it critical to retain experienced commercial real estate lawyers in order to ensure your rights and interests are being properly protected.

4. Closing Procedures: Proper closing procedures involve coordinating the necessary closing document, funds, and relevant stakeholders. Engaging an experienced commercial real estate lawyer ensures a seamless closing process, reducing potential risks and complications.

Mastering the Art of Commercial Property Purchase

With the right blend of due diligence, financial planning, and strategic decision-making, investing in commercial property can yield substantial returns and serve as a valuable asset in your investment portfolio.

Partnering with Vakili Law Group’s commercial real estate lawyers can provide the guidance, knowledge, and support needed to maximize your investment and achieve long-term success in the commercial property landscape.

The lawyers at Vakili Law Group have been advising individuals, development companies, real estate investment corporations, private lenders and small businesses for more than a decade and will be happy to assist you with your matter as well. For more information feel free to schedule a free 15-minute consultation with one of our lawyers by clicking on the following calendar link:

About the Author

Aaron Plener
Aaron Plener

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