Investing in commercial real estate comes with many decisions, one of the most important being whether to buy or lease. Both options have advantages and drawbacks. Having the expertise of a seasoned real estate lawyer at hand can be extremely beneficial in guiding you towards the most prudent choice for your business. A real estate lawyer brings an intimate familiarity with the legal intricacies entwined with both buying and leasing commercial properties. They serve as your legal guide, helping you navigate a multitude of considerations, including contracts, regulations, and local zoning laws, which underpin each option. Here is how a real estate lawyer can lend their expertise.
Buying Commercial Real Estate
Perhaps the most enticing aspect of purchasing commercial real estate is the ability to build equity. As you pay down the mortgage, your ownership interest becomes less encumbered by debt, which can be a valuable asset to you in the long run. However, purchasing commercial real estate requires a substantial upfront investment. Down payments, closing costs, and other associated fees can make it challenging for some businesses to afford commercial real estate. Further, once you close, you are ultimately responsible for maintenance and repairs (even if these obligations are offset by tenant payments).
Maintenance and repairs can be a significant ongoing expense, and if not managed properly, it can affect your bottom line. As such, it is critical that you have your real estate attorney involved from the beginning of the acquisition process to ensure that your short term and long-term concerns are addressed up front. Specifically, your real estate attorney can help with:
- Contract Negotiation: Your legal counsel can adroitly negotiate the terms of the purchase agreement, ensuring that the contractual framework not only safeguards your interests but also faithfully reflects your intentions.
- Due Diligence: A lawyer can orchestrate the due diligence process on the property by scrutinizing the title and identifying other legal conundrums that may impinge upon the acquisition. Some typical legal conundrums include identifying and addressing potential legal entanglements, environmental liabilities, or zoning issues.
- Financing: Your lawyer can also help you identify financing options at your disposal by helping you find the option that works best with your financial objectives and prevailing circumstances. In instances where you are procuring financing for the purchase, your lawyer can serve as a knowledgeable guide through the lending process, while reviewing loan documents to ascertain your rights and obligations.
- Tax Implications: The acquisition of real estate triggers an array of tax implications. Your legal counsel can furnish clarity regarding property tax obligations, potential deductions, and any tax incentives tethered to commercial property ownership.
- Long-Term Vision: No matter where your business is in its growth cycle, a real estate lawyer can be instrumental in evaluating whether property ownership harmonizes with your long-term growth prospects and prevailing industry trends.
Leasing Commercial Real Estate
Leasing can be a great vehicle for you especially if your business hinges on flexibility. Leasing requires a smaller upfront investment compared to buying. Businesses can allocate more capital to operations, growth, and other immediate needs. In addition, with a lease, you have a fixed monthly rent, making it easier to budget for occupancy costs. However, leasing does have its drawbacks, the most significant of which is the lack of equity building. Rent payments do not contribute to ownership, and you won’t benefit from property appreciation. Further, over the long term, leasing can become more expensive than buying, especially if rent increases significantly over time. With respect to leasing, your real estate lawyer can provide significant value in the following ways:
- Lease Review: A lawyer can assist in methodically assessing the comprehensive cost of leasing over the lease term, encompassing rent escalations, maintenance outlays, and can identify any covert expenditures that may lurk beneath the surface. A lawyer’s acumen comes to the fore during the comprehensive review of the lease agreement, where they can identify and highlight pivotal terms and conditions that bear direct relevance to your business. Additionally, they can engage in negotiations with the landlord to ensure that your business objectives are duly accommodated.
- Understanding Obligations: Leases frequently come laden with a number of tenant obligations, ranging from maintenance and repairs to payment of common area expenses, taxes, and insurance. Your lawyer can be extremely valuable to you in helping you grasp the nuances of these obligations while advocating for terms that are more conducive to your business interests. Skillful negotiation of lease terms, inclusive of rent stipulations, renewal options, and rent escalation clauses, requires a deft legal touch to ensure that you secure an equitable deal.
- Exit Strategy: A seasoned real estate attorney can furnish guidance on lease termination clauses and the potential ramifications of early exit, thereby assisting you in formulating a contingency plan should the exigency to relocate or downsize materialize.
Final Thoughts
The conundrum of choosing between the purchase and lease of commercial real estate is an exercise that hinges on your financial standing, business objectives, and risk appetite. Purchasing provides an opportunity for long-term equity cultivation and autonomy, albeit burdened with a heftier initial financial outlay and an array of enduring responsibilities. Conversely, leasing provides flexibility and lower upfront costs but lacks the prospect of equity accumulation and enduring stability. It is imperative to subject your options to exhaustive scrutiny, leveraging a deep understanding of your business’s unique requirements, prior to making any decisions. Collaboration with a seasoned real estate lawyer can provide expert guidance throughout the process, from evaluating property options to negotiating contracts. Their insights can help you make an informed decision that aligns with your business objectives and minimizes risks. Consulting with a lawyer early in the decision-making process can save you time, money, and potential legal complications down the road.
For more information or to seek counsel from our real estate & construction practice, please reach out to request a consultation or call us at 216-696-1422.
