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Commercial Risk Management
By Stephen Yeager, Broker/Owner of Weichert Real Estate Foothill Properties
For residential associates wanting to grow their business (and income) , branching into Commercial Real Estate sales is a sure bet! So get going and get trained!
Find a mentor, start studying your markets, specialize in property type, and attend the commercial property seminars and the other trade group meetings (CAR, NAR, CVAR, CCIM, SIOR, ICSC, BOMA to name a few). But BEWARE in risk management; spend some time asking questions about how to protect yourself and your clients from the gut wrenching pitfalls bestowed only to the commercial property transaction!
In comparing the CAR residential disclosure and sales contracts to the commercial contracts, it’s not just that they are night and day different because of the complex nature of a commercial property transfer, but that there are generally no readymade clauses that protect you, the unsuspecting agent, from getting caught up in a California investor’s litigious bad habits. Every commercial seller and buyer is in the business to make money, or build the business they operate. If investments fail, or businesses falter, the commercial property owner will look to you for any possible method of collecting on their losses! As a commercial broker, there are proven methods to minimize your exposure to the downside (getting sued) of collecting larger commissions for your commercial expertise. First and foremost, there are E&O policies that bring in $1,000,000 or more of liability coverage if you are found guilty of misrepresentation, neglect, or other mistakes that were made in the sale or purchase of the commercial property. This is, of course, “after the fact” expensive protection, which unfortunately, actually has increased the probability of landing you in the middle of a legal action, a deposition, a mediation, an arbitration, or a mandatory settlement conference. And let’s not forget the late night strategy meetings that our California attorneys love, because it pays their bills. (Not every attorney in California is unscrupulous, but in my experience, many are, and in every action brought fourth out there, the first question out of the attorney’s mouth is “Do you have E&O coverage, and what is your limit.”So now I bet we have your attention! How can you manage the risk of the commercial transaction? Here are a few suggestions that if incorporated into your commercial knowledge base, you will protect yourself and your clients from future litigation.
Clients need to “read the paperwork” Typically, commercial transactions are very similar to residential deals in the amount of paperwork we go through to document the sale. However, if you have a client that is busy running a business and they are buying investment properties which are not what they are experienced at doing, they should: 1) Either have an attorney go over the paperwork, or 2) They need to read the contracts and disclosures thoroughly themselves. If they do not have an attorney read the documents, watch out! Look at how they read the documents… if they are simply relying on you for filling out and reading the terms and they just “scan” them before signing, you need to STOP and DOCUMENT that they are not truly reading the terms. Write a letter to them, stating that they are to sign the documents only after they have read and understood every deal point and disclosure in the contracts ( have them sign this communication). Keep this document in the file; you will need this during your deposition the deposition you are in because the client told his prosecuting attorney that you told him or her to sign the documents without reading them.
Property Disclosures In California, commercial transactions do not require a “Real Estate Transaction Disclosure” (TDS). As a matter of fact, commercial transactions do not require an agency disclosure, but that’s another subject. Regarding the property disclosure, have the seller fill out a “Property Information” sheet. This can be obtained from AIREA forms (www.airea.com). Have the seller and buyer sign this form. This form documents every known issue the seller has knowledge on and also prompts the seller to think about all possible disclosures that would affect the property. The Natural Hazards Disclosure (NHD) IS required. Take care and have this completed for a “commercial property” not a residential NHD. Environmental Phase Inspections should be done on every commercial property you sell. If you don’t do them, and there is a cleanup to be done, then your buyer will not qualify for the “superfund” cleanup. A true story…after meeting with a seller of an industrial forging plant in Los Angeles some years ago, the owner and I toured the property to get a handle on where the structures were which we needed to scrap for the new use of any potential buyers. I walked around the corner to the back lot and low and behold, there emptying a 55 gallon drum of used oil onto the dirt was a worker looking very guilty… I did not take that listing. Someone did and I hope they did an Environment Phase Inspection.
Survey the property A common problem with raw land, industrial sites, and income properties are mistakes made when building on boundary lines and across easements or right of ways. Cities issue permits to build commercial structures based on their careful inspection of the plans, property owners eventually grow their business beyond the current constrains of the property, escrow and title companies close and record property transfers day in and day out, (they really get good at this process). But have you ever heard of a problem with a new building being built on a property line which was properly passed off by a city inspector? Or an addition at an industrial park that covered the Edison or water company right of way? Or how about the escrow company that included two additional lots that were adjacent to the subject lot in escrow in the recording at the county? I have, painfully so. Eliminate any boundary and easement legal nightmares by having the buyer purchase an ALTA Policy. This is an extra cost, but worth the expense. The title company will have the lot surveyed. And don’t just take it for granted that the fence you see on the property was the property line. Meet the surveyor with the buyer to mark the corners and confirm the fence lines!
Do you still want to sell commercial property? It’s up to you. I hear from residential agents quite frequently that they desire to “get into” commercial sales. I personally have enjoyed the business; have experienced the excitement of earning a six figure commission, but I have learned about just how involved the transaction can be when you serve your clients professionally. Make that extra effort to get training, focus on a category (multi-family, industrial, retail, etc. ) of commercial real estate so you know the ins and outs of seller and buyer needs (and/or legal traps) and you will find a great amount of joy from knowing that you served your clients well. And you will STAY OUT OF COURT!
Date Posted: 9/8/2009
Number of Views: 513
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