In this edition of the Champions DFW Podcast, Jim Kelley dissects the concept of the commercial real estate transaction with Julia Barth of the JP Barth Law Firm & Title Company. Julia’s colleagues Jennifer Nachtigal and Melanie Vargas also joined the real estate transaction conversation. Here is an excerpt from the free downloadable podcast:
Jim Kelley: Let’s jump right into the stuff of commercial real estate. First, we’re going talk about and focus today on commercial real estate transactions and the process. Let’s start off by telling us what is a real estate transaction and kind of define that for our listeners today.
Julia Barth: The commercial real estate transaction takes many forms. If you want to look at it from the perspective of what is the goal, what is the end game in the transaction. Is it someone such as a developer that is developing property and their end goal is to increase value in the property and make a profit on it and either lease it up or sell it or lease it up and hold it or sell it? Is it an owner looking to purchase a piece of Real Estate so that they can occupy it and operate their business out of it or perhaps a combination of both?
A lot of attorneys and doctors will develop or hire someone to develop a building for them, they will then occupy it and they will lease a portion of the space out so that perhaps the payments that they have to make on the building are reduced and that increases value in their business and then they have an asset. So when we look at commercial real estate transactions, you want to look at what type of transaction is it? Development, construction, or purchase of an existing building.
Jim Kelley: Okay. So you got a property, you’ve got a seller, generally, you got a buyer, you got financials that you’re looking at, compliance obligations. Let’s take, for instance, investment for one second. What is your counsel, your advice, when you’re dealing with potential investors when they’re evaluating a property? What are the checkboxes that you go through with them when they are evaluating an investment property?
Julia Barth: Well, so I think the buzzword here would be due diligence. When we look at a commercial real estate transaction, every different type of transaction has due diligence. And I think a good, broad definition of due diligence is…I was driving here today and I was thinking, “What is a good way to describe this to everyone that makes sense?” And I think it’s a process by which a party that’s seeking to profit from a transaction evaluates its potential for profitability against the risk of loss, right? So if we’re going to talk about due diligence and an investor, someone who’s either buying or developing property, where their end game is just profit.
They either want to sell it or they want to keep it and hold it and have rental income and own the asset for maybe 20 years from now. Then the first thing we’re going to look at with them if they were to hire us as their legal team or to help them with their due diligence process is on the front end of it, we’re going to try to evaluate the profitability based on looking at numbers, right? Let’s just take a construction project. We have an investor that’s building something. So we have to start with what are the costs of construction? What are the potential rents? That’s where having a broker involved is really important because your lawyer isn’t necessarily going to know the value of real estate in that area.
They’re going to know how to help you mitigate against risk but they’re not going to know what does the price per square foot of that land go for. And so part of your due diligence is to put a team together that can evaluate every aspect of the process, to assess its profitability and weigh your risks. So your broker can help you evaluate the cost of the land, the cost of construction, evaluate what’s the likely amount of rental income you can get in the area. The broker can help you evaluate your location and the area, specifically regarding the area, what kind of income is coming in besides the basic rent.