Unlike Maryland residential properties that can be handled without the involvement of a real estate professional (a real estate agent), Maryland commercial real estate transactions require a higher level of complexity and as a result, real estate professionals handle almost all commercial real estate transactions. In fact, the courts view individuals and business entities that partake in commercial real estate as “sophisticated” parties. As such, they are presume to have access to information and representation by counsel which means that they would be penny wise and pound foolish not to work with an experienced commercial real estate professional which can drastically mitigate their exposure to risk.

To be clear, there are usually two situations that arise where an individual or company will want to sell a commercial property.

They include:

  1. A GROWING BUSINESS. A common scenario of when an individual or business entity decides to sell their existing commercial space is when they have been in business for some time and have outgrown their current space and need an entirely new space.
  2. AS AN INVESTOR. Sometimes, investor of a commercial property will want to sell a current property to cash out their investment or, they may decide to sell in order to re-invest in another property that offers a larger return on investment.

When Any Three Of These Scenarios Occur, The Question Becomes, “What Do We Need To Do To Prepare For The Sale?”

Successfully selling your commercial real estate will require knowledge of the market, good timing, a competent real estate agent and a real estate lawyer. Unlike residential properties, commercial properties are frequently purchased and sold by savvy business owners, partners, and/ or corporations. They are also riddled with complex legal documents. These factors, along with the much higher price tag of commercial real estate, make this a more challenging world than residential home sales.

The first step to selling you commercial property is to gather all pertinent documents. When it comes to a commercial property, compared to purchasing a home, buyers are much more thoughtful about their investment and therefore, sellers would be prudent to have all the important documents handy since buyers will always request these documents as part of their due diligence. So examples of documents that you will want to gather include, rent rolls, previous appraisals, refinance and mortgage documents, environmental studies, copy of existing leases, permits for work done during your ownership as well as all copies of taxes, utilities, and equipment bills. These documents will give buyers confidence to help them decide that it is a sound investment. Additionally, many of these documents are required by mortgage companies in order to approve the loan.

The second actionable item you will need to take, much like when selling a home, you will need to make some aesthetic and/or structural improvements to the property. Commercial properties tend to have more wear than any other type of property because it they are heavily trafficked, more so than a home. So before you place the property on the market, you will want to make sure your property is cleaned up both on the inside and outside.

In determining what needs to be done in order to sell your property, it can be helpful to work with a real estate attorney and agent. When you hire our firm, we can help you not only with negotiating and drafting/reviewing the Purchase Agreement to make sure you are making the best decisions that are aligned with your investment goals. When you hire our firm, we can make sure that you both your legal and real estate interests are protected.

To learn more about the hidden benefits of working with an agent who is also an attorney, please be sure to download our informative guide, “The Hidden Benefits Of Working With An Agent Who Is Also An Attorney.”

When The Property Is Ready To Be Placed On The Market, The Question Becomes, “Should We Use A 1031 Exchange?”

A 1031 Exchange refers to taking advantage of IRS Tax Code Section 1031. This tax code allows a real estate investor to swap their investment on one real property with another one. By doing so, the investor can defer taxes on the capital gains made during the initial real estate investment

Consider this example of how a 1031 exchange works:

  1. You invest in a commercial real estate property, Property A.
  2. Through your investment in Property A, you make $250,000 in net profit.
  3. If you were to pay a combined capital gains tax of 23% on your profit, you would owe the IRS $57,500. As a result, you would only make $192,500 true profit from your investment in Property A.
  4. However, if you decide to reinvest the entirety of your $250,000 profit into a new commercial real estate property, Property B, you do not have to pay the combined capital gains taxes from Property A.

Thanks to Section 1031, as long as you reinvest your investment profit in a “real property of like-kind“ then your trade of properties nullifies the gains or loses made from your initial investment.

When Do You Need a 1031 Exchange?

You get a 1031 exchange when you want to grow your investment portfolio without enduring capital gains taxes. If you’re a real estate investor that wants to reinvest your profits into new business adventures, you should consider a 1031 exchange. Remember, you cannot take any profits from your initial investment – they need to be directly exchanged for new real property.

You must apply for a 1031 Exchange within 45 days of closing on your commercial real estate investment. During this 45 day window, you need to identify your replacement real property for the 1031 Exchange. An investor may choose to nominate up to three replacement properties for their 1031 Exchange approval. After the IRS approves the 1031 Exchange, the investor has 180 days to secure the purchase of their new real property.

Selling Commercial Real Estate with a 1031 Exchange

Here’s what a commercial real estate seller using a 1031 Exchange needs to know:

Subsidized Closing Costs. You can use funds from a 1031 exchange to pay for qualifying costs associated with closing on your real property. Some  closing costs that qualify are finder’s fees, sales commissions on the property, legal and notary fees, property taxes and more.

Unsubsidized Closing Costs. 1031 exchange funds cannot be used to cover certain closing costs, including application fees, property utilities, security deposits, mortgage insurance, property liability insurance and more. For a full understanding of what costs are covered and which aren’t contact you real estate attorney or financial manager.

Extra Cash Gets Taxed. It’s common for a percentage of profits to be leftover after your exchange on real property for another. If you receive this leftover in the form of cash, you will need to pay the applicable capital gains tax.

As you can see, the process can be complicated and there are a lot of details that need to be properly addressed. For a seller on their own, the process can be confusing and frustrating and it is very possible key details may be overlooked. It is important for a seller to work with a real estate attorney  and a trained commercial real estate agent to ensure the entire process goes smoothly and efficiently. When you hire our firm, we can make sure that you both your legal and real estate interests are protected.

To learn more about the hidden benefits of working with an agent who is also an attorney, please be sure to download our informative guide, “The Hidden Benefits Of Working With An Agent Who Is Also An Attorney.”


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