Business Real Estate Acquisition - A Deal That You Can Grow With

June 5, 2003

Buying commercial real estate and protecting your investment are important matters that require careful consideration on a variety of levels. The purpose of the acquisition, either as investment property or as the physical home for your business, will help to determine whether many of the following considerations can potentially impact you. In many circumstances it is wise to insulate real estate from the liabilities of the business and vice versa, so it is wise to consult with professional advisors before entering into negotiations.

Determining how the commercial real estate will be owned is the initial consideration. Should it be owned by the existing business entity or is it in the best interests of the parties involved to establish a separate entity for real estate holdings? Examination of the pros and cons associated with the various legal entities, LLP, LLC, Sub S Corporation or trust, will help determine which is most appropriate for your business. Tax and liability issues must also be considered and discussed with your accountant. In any event, all of these issues must be examined before entering into a transaction.

It is also important to thoroughly examine all available historical information regarding prior usage of the land and/or building(s). Such historical issues will include environmental concerns, zoning issues, impact (if any) of Brownsfield legislation and the potential pitfalls arising from prior use. If the land/building is intended to be utilized in the same way as in the past, then the continued use (though not otherwise permitted) may be legally permissible under what is referred to as a "grandfathered use". It is wise to have this information as soon as possible.

Environmental or zoning issues will potentially impact the proposed use of the building. Have possible wetlands areas been identified and has soil testing been done? Has a structure that you plan to rehabilitate been classified as an "abandoned building", which if true may preclude a grandfathered use. Sometimes zoning laws prohibit outdoor storage of certain types or sizes of materials or equipment. If the property is within an industrial park, the park’s zoning regulations must also be reviewed, since the park may impose additional requirements that may limit or affect your use. Industrial park regulations are typically more stringent than town and city laws, and the park policies override community ones. Assumed matters such as outdoor storage capabilities, parking and landscaping options may be restricted. It is better to understand, and when possible investigate potential environmental and zoning issues, as well as the rules and regulations of the industrial park, before entering an agreement to purchase real estate.

Whether the real estate purchase is intended to be a starting location for a business or a new home for a growing firm, expansion potential must be thoroughly investigated. Brownfields legislation, which restricts renewed use of dormant or abandoned buildings, may come into play and must be considered. Zoning issues and environmental concerns, such as wetlands legislation can also limit expansion potential on property, so it is prudent to review all regulations regarding land use before entering into a contract to purchase. Identifying potential obstacles that must be overcome in the event of an expansion can prevent potentially lengthy and costly relocation costs down the road, including down-time during a move, which may cripple a business with loss of income and productivity.

It is also prudent to work with a qualified commercial realtor. Commercial property is a specialty, and it is vital to identify an expert who has the skills and knowledge to identify, locate and assess suitable property for consideration. A knowledgeable and experienced commercial realtor will have familiarity with zoning and environmental issues, so he/she can be of great assistance in the elimination of inappropriate properties. This can save time and money in the long run.

Financing is another critical issue that must be carefully approached. Using the right lender for an individual project can make or break the deal. Various lenders have specific lending philosophies, and one lender may not favor the kind of financing necessary in a particular circumstance. Attorneys who practice in the area of commercial real estate have established relationships with various lenders and are thoroughly familiar with their lending philosophies and strategies. Matching available collateral and equity with the right lender and program is tricky, so it is advantageous for a borrower to avail him/herself of the resources of a good business attorney.

Location, location, location. Little is more important when purchasing commercial real estate. The correct property will offer expansion potential and the ability to utilize the grounds to your best advantage. Industrial park regulations, zoning and environmental concerns, prior use and even the established business entity of the owner must be carefully considered before entering into purchase negotiations. It is best to be prepared so there are no unpleasant surprises down the road, when the needs of your business change.

Francis R. Mirkin, Esquire is an experienced partner with Bacon & Wilson, P.C. His areas of practice include commercial and residential real estate, as well as commercial loan documentation, zoning and subdivision issues. He also represents numerous area financial lending institutions and business borrowers. He can be reached at 413-781-0560 or fmirkin@bacon-wilson.com

Julie A. Dialessi-Lafley, Esquire is a multi-faceted associate with Bacon & Wilson, P.C. She is experienced in all aspects of corporate, business, commercial and residential real estate, as well as commercial loan documentation, borrower and lender representation, transactional law and general legal matters. She can be reached at 413-781-0560 or jdialessi@bacon-wilson.com

by: Francis R. Mirkin, Esq., Julie A. Dialessi-Lafley, Esq.

Valley Business Outlook
June 2003