What exactly is Commercial Real Estate?

The term “Commercial Real Estate” can be used to refer to any dealing with real property in a business context. It could involve leasing out office space, owning an apartment complex, or selling real property along with and as a part of the sale of a business. We help you with looking through market and to assess available opportunities.

What are some of the common pitfalls involving a real estate business deal?

Buying a multifamily building or a piece of investment property, there will always be risks involved. Your goal should be to lessen these risks as much as you can.

Examples of potential problems that often times lead to legal disputes include:

  • Zoning and land use problems
  • Market fluctuations
  • Hazardous waste and environmental contamination
  • Defects in title
  • Debt service and lender requirements
  • Mechanics liens

What things do I need to consider in analyzing commercial space?

There are a number of considerations in selecting a commercial site. Depending on the type of business and how it operates, the following factors may be of great importance: location (near consumers, clients, interstate highways, vendors, airports, etc.), cost (base rent, triple net charges, build out cost, utilities, etc.), zoning restrictions and private covenants, traffic counts, access, visibility, available signage and parking, tenant mix and neighborhood demographics.

What is the difference between a net lease and a gross lease?

Net and gross are different ways of quoting rent. A gross lease means that the stated rental rate includes the major expenses from real estate taxes, property insurance and common area maintenance, and that no additional rent for those items is required to be paid. In an absolute gross or full service lease, the quoted rate will include basic utilities such as electricity, gas, water and sewer. A triple net or “NNN lease” is one where the rent is quoted as a base rent net of, or not including, the expenses for real estate taxes, building insurance and common area maintenance. These three expenses, as well as the utilities, are an extra charge over and above the base rent. Under a NNN lease, the tenant will also be responsible for utilities in addition to the NNN expenses. In between a gross rental and a NNN rental is a gross plus utilities rental where the quoted rent covers the taxes, insurance and maintenance expenses but does not include utility charges for the leased premises such as gas, electricity, sewer and water. Typically, a tenant will pay for its own telephone and internet services under any of these lease types.

What do I need to do if I want to list a property for sale or lease?

In order to market a property, the South Dakota Real Estate Commission requires that brokers obtain a written, signed listing agreement from the property owner. This agreement sets forth the duties of the broker and the client and establishes how the broker will be compensated for his or her efforts. In addition, there is an Agency Relationships Disclosure that must be signed by the client acknowledging that the broker has explained the different types of agency relationships offered by the broker. Finally, there is an Agency Agreement Addendum that must also be signed disclosing how the agency relationship will work if the listing broker produces the buyer or tenant for the property and allows the client to consent to either a disclosed limited agency or an appointed agency.

What will be done to market my property if I list it?

When a commercial property is listed, we prepare a spec sheet for the property listing the details of the offering. We will also place a sign on the offered property advising of its availability (unless the client does not want such a sign posted). The listing is also placed on Commercial Source, a national computerized listing service maintained by the National Association of Realtors for commercial properties. Depending on the nature and scope of the listing assignment, we may also engage in other specifically targeted marketing of the property via direct mail, phone calling campaigns, social media or other methods of getting word out about the property to those parties most likely to have interest or have clients that would be interested.

What is a 1031 Exchange and how does it work?

A 1031 exchange is a method of trading properties that, under Section 1031 of the Internal Revenue Code, is done without the current payment of tax on the capital gain. Rather, the owner’s tax basis in the property is transferred to the replacement property received in the exchange. When a property is exchanged in accordance with the rules promulgated by the IRS, the tax on the gain is not eliminated, but is deferred until the replacement property is subsequently sold or transferred. By continuing to elect Section 1031 treatment on subsequent real property exchanges, a property owner can defer taxes indefinitely. Another section of the tax code allows heirs of a deceased property owner to inherit the property at a stepped up date of death fair market value tax basis, thus eliminating the capital gains tax entirely and leading to the strategy of swap ’til you drop transactions. Under the IRS rules, once a taxpayer sells a property, he or she is allowed a specified time period to identify the replacement property and then to close on its acquisition. At no time during this process, however, can the taxpayer have access to the sale proceeds from the first transaction. Thus, those funds need to be held by the title company or other qualified intermediary until used to acquire the replacement property. There are many technical requirements for this type of exchange, and we can help connect with the right people to prepare the necessary paperwork and guide you through the process

Do I need a lawyer in commercial real estate?

Sometimes. Brokers can find and analyze properties, but another set of qualified eyes are often helpful with high liability transactions. Leases are also typically prepared by the owner’s lawyer, and not the real estate broker, for review by the tenant’s lawyer. In sale transactions, lawyers are often involved in document review and title review. Brokers often use lawyers to review their own transactions and recommend that clients do the same!

What is CAM in commercial real estate?

CAM stands for common area maintenance.  People often refer to all NNN fees as “CAMs”, but that is inaccurate.  Common area maintenance are a set of costs for landscape maintenance, snow removal, parking lot maintenance, exterior building and common area (such as common bathrooms, lobbies and hallways)  maintenance and a fee for managing the building.  Capital items such as parking lot replacements, or roof replacements are not CAM items.

Could I sell business by you?

Selling a business is specialized and a little different than selling a building. A business is a non-tangible asset with some tangible personal property attached. A business is listed in the same manner as a lease or a building listing, but is based on the profitability and personal property value associated with that business. Rarely will a “for sale” sign be placed on the business as that will often discourage customers and be counterproductive in the quest to sell. Consult with a business specialist to determine value.