5 real estate tips for small business owners
Consider this before selling or buying property
By attorney Scott Rost, Special to THELAW.TV
So, like many of us in business, you, small business owner, have noticed things really starting to look up lately! Business is improving, property values are trending upward and appear to have stabilized, and a real sense of optimism seems finally to be taking hold. If you have some property you had been wanting to sell, and were waiting for prices to rebound, you think now may be the time. Conversely, if you have been waiting to buy your own facility, you now feel confident enough to make that investment. What are the things you should consider when buying or selling?
First, know your own goals and limitations. Understand within your own mind, and be able to articulate to your attorney, accountant, banker, business partners, real estate agent, and spouse, what you seek in the sale or purchase before approaching buyer or seller. Make sure that your partners or other owners of the business understand the same things and desire the same outcomes you do. This can save much grief and misunderstanding later.
Second, ensure that your existing business structure is sound and sufficient. You may already have a formal business entity in place, such as a corporation, limited liability company, or other legal framework under the laws of your state. Or you may simply be doing business as a "sole proprietorship," under your own name or a "fictitious name." If you own your business with someone else, you may be legally in a partnership -- people who own businesses together frequently refer to themselves as "partners" irrespective of what their formal arrangements are, and there are different forms of partnerships. Florida, where I practice law, recognizes several types of partnerships, some requiring state filings. If you are simply doing business together with others expecting to make a profit with no documents filed, you are a "general partnership" by default. Different legal features pertain to each of these business structures, so be confident that you know which one you have, and make any needed changes or choose another if appropriate, before buying property and taking title in its name, or selling what it has.
Next, structure the transaction itself with your advisors. Your lawyer should be involved throughout the process. Your attorney will draft the contract for sale or purchase, and if a real estate agent is involved, he or she may also generate or work with the contract and other important sale documents. If you are buying and financing any part of the purchase, you will need to work with your lender or mortgage broker on your loan application and commitment, loan agreement, and the ultimate loan documents. Your attorney should work with you to review all of these documents in advance. Your accountant may prepare financials, especially if you are a buyer and a borrower. If you are buying property which others will occupy, you will likely have a lease prepared as well. If selling leased property, you will assign the lease to your buyer.
It is very important to both buyers and sellers that the "due diligence" stage of the transaction, between contract and closing, go smoothly. Sellers need to show buyers what they need to see, and buyers need to look with open eyes. This helps prevent costly and unfortunate lawsuits after the fact. Your lawyer and likely your accountant, again, will work together during this stage: if real estate agents are involved, they may trade information between the parties. Other non-financial information, such as environmental and engineering/structural building data may form part of your due diligence. Finally, at closing, your lawyer will ensure that the purchase or sale occurs as the contract specifies, together with the loan, if there is one and any associated other transaction, such as a lease assignment.
Another important set of considerations is contingency planning: all the "what ifs?" This relates to the first topic above -- goals and limitations. Consider your tolerances and best/worst case scenarios, and what to do if the less fortunate ones materialize with your lawyer. If the other party doesn't close, due you sue? If so, what for and what are your chances? If you are seller, with sales proceeds coming in, what are the tax ramifications? If you are the buyer, are there potential environmental issues or other liabilities associated with the property? Could there be issues involving legal title to the property? In Florida, seller typically purchases a policy of title insurance for the benefit of buyer, and any lender for buyer as well, and the seller's lawyer typically also serves as title insurance agent for this purpose -- other states have different laws and procedures to this effect. What are the prospects for third party claims that could be raised that could thwart closing, or arise afterward? All these foreseeable perils should be reviewed with your lawyer before closing, anticipated as much as possible, and dealt with.
Finally, consider your exit strategy and post-closing goals. If you are a seller, how will you dispose of the net proceeds, and where will you take your business from here? If you are buying, what use do you make of the property? Will you lease to others, or occupy yourself for your own business operations? Either way, you should plan your own business succession and personal estate planning, not only for your business, but its ultimate beneficiaries: yourself and your loved ones. That's what we're all in it for, after all.
The author, Scott Rost, is a real estate lawyer at South Milhausen in Orlando, Fla.
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