Commercial real estate–apartment buildings, warehouses, office buildings, retail space and business property–can frequently be a good investment. Unlike buying stocks or bonds, with real estate you have something tangible to show for your money, and commercial property, by definition, continues to earn you money. However, how much do you really know about buying and selling commercial property and how it differs from buying and selling your own home?
Commercial Real Estate FAQs
Many investors considering purchasing an apartment building or small office building have questions, but they don’t know whom to ask. Below are a few of the more commonly asked questions:
1. What should be included in a sales contract for a commercial property?
Commercial real estate contracts are slightly different from those for residential properties. Essential elements include an exact description of the property including the land, the purchase price and whether the money is to be paid at closing or in installments, a list of any equipment or personal property (such as restaurant equipment) that is included in the sale, any contingencies, how tax and utility bills are to be settled between you and the seller, what title insurance or proof of clear title the seller must provide, and the closing and possession dates.
2. The building I’m considering buying has tenants. Can I evict them and find my own tenants?
Usually not. Most apartment, retail and office leases allow the tenants to stay for the duration of the lease so long as they pay their rent, no matter who owns the building.
3. What does the term “build-out” mean in a commercial real estate transaction?
Often, owners of office buildings or retail space will offer to finish the interior of the space (or “build-out” the space) to the tenant’s specifications in return for a (usually multi-year) lease.
4. What does “contingency” mean in a commercial real estate contract?
A contingency is a condition that must be met before you are legally bound to complete the sale. Examples include the building passing an inspection, your securing financing and the seller providing a satisfactory environmental safety report.
5. What kind of insurance do I need for a commercial building?
Unlike your personal real estate insurance, you only need to insure the structure, not the contents, of a commercial property. (Contents are the responsibility of the tenant.) You’ll also need liability insurance in case someone is injured on your property. Rent interruption insurance is sometimes desirable. Such insurance reimburses you for lost rent in the event your building is damaged by a fire, storm, tornado or similar disaster.