When speaking about purchases of any goods or services, there’s a saying as old as time: buyer beware. In common law, this is even considered a doctrine: caveat emptor. This legal doctrine comes into play in commercial real estate transactions. What this means is that the purchaser of a piece of commercial real estate has fewer protections relative to someone purchasing their first home or condo in Florida. This blog will explore some things commercial real estate sellers are and aren’t required to disclose.
Patent Defects vs. Latent Defects
In a structure, a patent defect is one that is easily observable. Synonymous with this term is a material defect; both of these issues can negatively affect the value of real property. Differing from residential real estate sales, commercial landlords are not required to explicitly disclose patent defects to potential buyers. This is where the doctrine of caveat emptor comes into play. However, the seller of commercial real estate is not permitted to take steps to actively conceal a patent defect from a potential buyer. This is considered fraud.
However, in both commercial and residential real estate sales, any latent defects are required to be disclosed to a potential buyer. These are defects that are not obvious and take some time to surface; examples include damage inside walls and issues with electrical systems.
For real estate investors, one of the most important figures they will want to know is the property’s capitalization rate. This is similar to a return on investment (ROI) and can be calculated using several different methods. One way it can be calculated is on a pro-forma basis, which provides an estimate for the next 12 months. Another method used is an annualized or trailing method which evaluates the past three to six months.
There are also several different types of capitalization rates; three common classifications are nominal, market, and economic. Each uses a slightly different formula to come up with the rate for a particular piece of property. When property sellers are not sure how to come up with the capitalization rate and other important calculations, they sometimes work up an educated guess. This is usually not sufficient when it comes to disclosure obligations. Another common mistake is calculating these figures using different methods. The numbers and formulas need to be uniform.
These are just some of the things that are required to be disclosed in a commercial real estate sale. To ensure that you fulfill your legal obligations when selling property or for representation when buying property, get in touch with our firm at (954) 368-4050.