How Commercial Law Firms Help

For any business owner, it is important to use a commercial law firm for a variety of reasons; it governs commerce and business. This law is especially important for those who deal with transactions on a regular basis. Other activity this law regulates is the hiring practice, sales, corporate contracts and consumer goods. This law is a branch of the civil law and is used to deal with the public (and private) law.

A corporation or business owner would find the assistance of a commercial law firm less stressful than trying to handle certain situations on their own. It also deals with merchant shipping, bills of exchange and partnership. Because of the recession, many people are falling behind on their bills including rent. This forces individuals to get behind on their payments, which increases their chances of breaking corporate contracts. Sometimes, in order for a landlord to get their owed funds, they may need to seek the assistance of a firm who knows how to handle certain situations like this.

Landlords are not the only ones who can benefit from this type of firm; online businesses and e-commerce stores can also use the assistance of a commercial law firm. Buying anything over the Internet can be risky. The increase of Internet fraud has increased including, phishing scams, reverse payment scams and much more. Online merchants and credit card companies may not always be able to protect the seller or the buyer. Because it is hard to determine if goods were shipped (because the transaction took place over the Internet), it would the seller’s word against the buyer’s. A law firm can assist clients in claiming their case if they were scammed or ripped off.

Many other countries have adopted various civil codes due to the increase of online transactions. There have also been efforts made to create a unified body in the United States related to commercial law. The Uniform Commercial Code has been the most successful attempt at creating this unification. Other states included are the District of Columbia, U.S. Virgin Islands, Guam and Commonwealth of Puerto Rico.

Commercial law is important to regulate how commerce is regulated. This law actually protects the consumer and the seller (and in some cases; employees). Since this law is held under certain safety and privacy laws, unethical business practices can be examined if brought to court. This is why it is essential to seek the services of a such a law firm if a certain level of transactions will take place.

Insurance Law – An Indian Perspective

INTRODUCTION

“Insurance should be bought to protect you against a calamity that would otherwise be financially devastating.”

In simple terms, insurance allows someone who suffers a loss or accident to be compensated for the effects of their misfortune. It lets you protect yourself against everyday risks to your health, home and financial situation.

Insurance in India started without any regulation in the Nineteenth Century. It was a typical story of a colonial epoch: few British insurance companies dominating the market serving mostly large urban centers. After the independence, it took a theatrical turn. Insurance was nationalized. First, the life insurance companies were nationalized in 1956, and then the general insurance business was nationalized in 1972. It was only in 1999 that the private insurance companies have been allowed back into the business of insurance with a maximum of 26% of foreign holding.

“The insurance industry is enormous and can be quite intimidating. Insurance is being sold for almost anything and everything you can imagine. Determining what’s right for you can be a very daunting task.”

Concepts of insurance have been extended beyond the coverage of tangible asset. Now the risk of losses due to sudden changes in currency exchange rates, political disturbance, negligence and liability for the damages can also be covered.

But if a person thoughtfully invests in insurance for his property prior to any unexpected contingency then he will be suitably compensated for his loss as soon as the extent of damage is ascertained.

The entry of the State Bank of India with its proposal of bank assurance brings a new dynamics in the game. The collective experience of the other countries in Asia has already deregulated their markets and has allowed foreign companies to participate. If the experience of the other countries is any guide, the dominance of the Life Insurance Corporation and the General Insurance Corporation is not going to disappear any time soon.
The aim of all insurance is to compensate the owner against loss arising from a variety of risks, which he anticipates, to his life, property and business. Insurance is mainly of two types: life insurance and general insurance. General insurance means Fire, Marine and Miscellaneous insurance which includes insurance against burglary or theft, fidelity guarantee, insurance for employer’s liability, and insurance of motor vehicles, livestock and crops.

LIFE INSURANCE IN INDIA

“Life insurance is the heartfelt love letter ever written.

It calms down the crying of a hungry baby at night. It relieves the heart of a bereaved widow.

It is the comforting whisper in the dark silent hours of the night.”

Life insurance made its debut in India well over 100 years ago. Its salient features are not as widely understood in our country as they ought to be. There is no statutory definition of life insurance, but it has been defined as a contract of insurance whereby the insured agrees to pay certain sums called premiums, at specified time, and in consideration thereof the insurer agreed to pay certain sums of money on certain condition sand in specified way upon happening of a particular event contingent upon the duration of human life.

Life insurance is superior to other forms of savings!

“There is no death. Life Insurance exalts life and defeats death.

It is the premium we pay for the freedom of living after death.”

Savings through life insurance guarantee full protection against risk of death of the saver. In life insurance, on death, the full sum assured is payable (with bonuses wherever applicable) whereas in other savings schemes, only the amount saved (with interest) is payable.

The essential features of life insurance are a) it is a contract relating to human life, which b) provides for payment of lump-sum amount, and c) the amount is paid after the expiry of certain period or on the death of the assured. The very purpose and object of the assured in taking policies from life insurance companies is to safeguard the interest of his dependents viz., wife and children as the case may be, in the even of premature death of the assured as a result of the happening in any contingency. A life insurance policy is also generally accepted as security for even a commercial loan.

NON-LIFE INSURANCE

“Every asset has a value and the business of general insurance is related to the protection of economic value of assets.”

Non-life insurance means insurance other than life insurance such as fire, marine, accident, medical, motor vehicle and household insurance. Assets would have been created through the efforts of owner, which can be in the form of building, vehicles, machinery and other tangible properties. Since tangible property has a physical shape and consistency, it is subject to many risks ranging from fire, allied perils to theft and robbery.
Few of the General Insurance policies are:

Property Insurance: The home is most valued possession. The policy is designed to cover the various risks under a single policy. It provides protection for property and interest of the insured and family.

Health Insurance: It provides cover, which takes care of medical expenses following hospitalization from sudden illness or accident.
Personal Accident Insurance: This insurance policy provides compensation for loss of life or injury (partial or permanent) caused by an accident. This includes reimbursement of cost of treatment and the use of hospital facilities for the treatment.

Travel Insurance: The policy covers the insured against various eventualities while traveling abroad. It covers the insured against personal accident, medical expenses and repatriation, loss of checked baggage, passport etc.

Liability Insurance: This policy indemnifies the Directors or Officers or other professionals against loss arising from claims made against them by reason of any wrongful Act in their Official capacity.

Motor Insurance: Motor Vehicles Act states that every motor vehicle plying on the road has to be insured, with at least Liability only policy. There are two types of policy one covering the act of liability, while other covers insurers all liability and damage caused to one’s vehicles.

JOURNEY FROM AN INFANT TO ADOLESCENCE!

Historical Perspective

The history of life insurance in India dates back to 1818 when it was conceived as a means to provide for English Widows. Interestingly in those days a higher premium was charged for Indian lives than the non-Indian lives as Indian lives were considered more risky for coverage.

The Bombay Mutual Life Insurance Society started its business in 1870. It was the first company to charge same premium for both Indian and non-Indian lives. The Oriental Assurance Company was established in 1880. The General insurance business in India, on the other hand, can trace its roots to the Triton (Tital) Insurance Company Limited, the first general insurance company established in the year 1850 in Calcutta by the British. Till the end of nineteenth century insurance business was almost entirely in the hands of overseas companies.

Insurance regulation formally began in India with the passing of the Life Insurance Companies Act of 1912 and the Provident Fund Act of 1912. Several frauds during 20’s and 30’s desecrated insurance business in India. By 1938 there were 176 insurance companies. The first comprehensive legislation was introduced with the Insurance Act of 1938 that provided strict State Control over insurance business. The insurance business grew at a faster pace after independence. Indian companies strengthened their hold on this business but despite the growth that was witnessed, insurance remained an urban phenomenon.

The Government of India in 1956, brought together over 240 private life insurers and provident societies under one nationalized monopoly corporation and Life Insurance Corporation (LIC) was born. Nationalization was justified on the grounds that it would create much needed funds for rapid industrialization. This was in conformity with the Government’s chosen path of State lead planning and development.

The (non-life) insurance business continued to prosper with the private sector till 1972. Their operations were restricted to organized trade and industry in large cities. The general insurance industry was nationalized in 1972. With this, nearly 107 insurers were amalgamated and grouped into four companies – National Insurance Company, New India Assurance Company, Oriental Insurance Company and United India Insurance Company. These were subsidiaries of the General Insurance Company (GIC).

The life insurance industry was nationalized under the Life Insurance Corporation (LIC) Act of India. In some ways, the LIC has become very flourishing. Regardless of being a monopoly, it has some 60-70 million policyholders. Given that the Indian middle-class is around 250-300 million, the LIC has managed to capture some 30 odd percent of it. Around 48% of the customers of the LIC are from rural and semi-urban areas. This probably would not have happened had the charter of the LIC not specifically set out the goal of serving the rural areas. A high saving rate in India is one of the exogenous factors that have helped the LIC to grow rapidly in recent years. Despite the saving rate being high in India (compared with other countries with a similar level of development), Indians display high degree of risk aversion. Thus, nearly half of the investments are in physical assets (like property and gold). Around twenty three percent are in (low yielding but safe) bank deposits. In addition, some 1.3 percent of the GDP are in life insurance related savings vehicles. This figure has doubled between 1985 and 1995.

A World viewpoint – Life Insurance in India

In many countries, insurance has been a form of savings. In many developed countries, a significant fraction of domestic saving is in the form of donation insurance plans. This is not surprising. The prominence of some developing countries is more surprising. For example, South Africa features at the number two spot. India is nestled between Chile and Italy. This is even more surprising given the levels of economic development in Chile and Italy. Thus, we can conclude that there is an insurance culture in India despite a low per capita income. This promises well for future growth. Specifically, when the income level improves, insurance (especially life) is likely to grow rapidly.

INSURANCE SECTOR REFORM:

Committee Reports: One Known, One Anonymous!

Although Indian markets were privatized and opened up to foreign companies in a number of sectors in 1991, insurance remained out of bounds on both counts. The government wanted to proceed with caution. With pressure from the opposition, the government (at the time, dominated by the Congress Party) decided to set up a committee headed by Mr. R. N. Malhotra (the then Governor of the Reserve Bank of India).

Malhotra Committee

Liberalization of the Indian insurance market was suggested in a report released in 1994 by the Malhotra Committee, indicating that the market should be opened to private-sector competition, and eventually, foreign private-sector competition. It also investigated the level of satisfaction of the customers of the LIC. Inquisitively, the level of customer satisfaction seemed to be high.

In 1993, Malhotra Committee – headed by former Finance Secretary and RBI Governor Mr. R. N. Malhotra – was formed to evaluate the Indian insurance industry and recommend its future course. The Malhotra committee was set up with the aim of complementing the reforms initiated in the financial sector. The reforms were aimed at creating a more efficient and competitive financial system suitable for the needs of the economy keeping in mind the structural changes presently happening and recognizing that insurance is an important part of the overall financial system where it was necessary to address the need for similar reforms. In 1994, the committee submitted the report and some of the key recommendations included:

o Structure

Government bet in the insurance Companies to be brought down to 50%. Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations. All the insurance companies should be given greater freedom to operate.
Competition

Private Companies with a minimum paid up capital of Rs.1 billion should be allowed to enter the sector. No Company should deal in both Life and General Insurance through a single entity. Foreign companies may be allowed to enter the industry in collaboration with the domestic companies. Postal Life Insurance should be allowed to operate in the rural market. Only one State Level Life Insurance Company should be allowed to operate in each state.

o Regulatory Body

The Insurance Act should be changed. An Insurance Regulatory body should be set up. Controller of Insurance – a part of the Finance Ministry- should be made Independent.

o Investments

Compulsory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%. GIC and its subsidiaries are not to hold more than 5% in any company (there current holdings to be brought down to this level over a period of time).

o Customer Service

LIC should pay interest on delays in payments beyond 30 days. Insurance companies must be encouraged to set up unit linked pension plans. Computerization of operations and updating of technology to be carried out in the insurance industry. The committee accentuated that in order to improve the customer services and increase the coverage of insurance policies, industry should be opened up to competition. But at the same time, the committee felt the need to exercise caution as any failure on the part of new competitors could ruin the public confidence in the industry. Hence, it was decided to allow competition in a limited way by stipulating the minimum capital requirement of Rs.100 crores.

The committee felt the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. For this purpose, it had proposed setting up an independent regulatory body – The Insurance Regulatory and Development Authority.

Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament in December 1999. The IRDA since its incorporation as a statutory body in April 2000 has meticulously stuck to its schedule of framing regulations and registering the private sector insurance companies.

Since being set up as an independent statutory body the IRDA has put in a framework of globally compatible regulations. The other decision taken at the same time to provide the supporting systems to the insurance sector and in particular the life insurance companies was the launch of the IRDA online service for issue and renewal of licenses to agents. The approval of institutions for imparting training to agents has also ensured that the insurance companies would have a trained workforce of insurance agents in place to sell their products.

The Government of India liberalized the insurance sector in March 2000 with the passage of the Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership. Under the current guidelines, there is a 26 percent equity lid for foreign partners in an insurance company. There is a proposal to increase this limit to 49 percent.

The opening up of the sector is likely to lead to greater spread and deepening of insurance in India and this may also include restructuring and revitalizing of the public sector companies. In the private sector 12 life insurance and 8 general insurance companies have been registered. A host of private Insurance companies operating in both life and non-life segments have started selling their insurance policies since 2001

Mukherjee Committee

Immediately after the publication of the Malhotra Committee Report, a new committee, Mukherjee Committee was set up to make concrete plans for the requirements of the newly formed insurance companies. Recommendations of the Mukherjee Committee were never disclosed to the public. But, from the information that filtered out it became clear that the committee recommended the inclusion of certain ratios in insurance company balance sheets to ensure transparency in accounting. But the Finance Minister objected to it and it was argued by him, probably on the advice of some of the potential competitors, that it could affect the prospects of a developing insurance company.

LAW COMMISSION OF INDIA ON REVISION OF THE INSURANCE ACT 1938 – 190th Law Commission Report

The Law Commission on 16th June 2003 released a Consultation Paper on the Revision of the Insurance Act, 1938. The previous exercise to amend the Insurance Act, 1938 was undertaken in 1999 at the time of enactment of the Insurance Regulatory Development Authority Act, 1999 (IRDA Act).

The Commission undertook the present exercise in the context of the changed policy that has permitted private insurance companies both in the life and non-life sectors. A need has been felt to toughen the regulatory mechanism even while streamlining the existing legislation with a view to removing portions that have become superfluous as a consequence of the recent changes.

Among the major areas of changes, the Consultation paper suggested the following:

a. merging of the provisions of the IRDA Act with the Insurance Act to avoid multiplicity of legislations;

b. deletion of redundant and transitory provisions in the Insurance Act, 1938;

c. Amendments reflect the changed policy of permitting private insurance companies and strengthening the regulatory mechanism;

d. Providing for stringent norms regarding maintenance of ‘solvency margin’ and investments by both public sector and private sector insurance companies;

e. Providing for a full-fledged grievance redressal mechanism that includes:

o The constitution of Grievance Redressal Authorities (GRAs) comprising one judicial and two technical members to deal with complaints/claims of policyholders against insurers (the GRAs are expected to replace the present system of insurer appointed Ombudsman);

o Appointment of adjudicating officers by the IRDA to determine and levy penalties on defaulting insurers, insurance intermediaries and insurance agents;

o Providing for an appeal against the decisions of the IRDA, GRAs and adjudicating officers to an Insurance Appellate Tribunal (IAT) comprising a judge (sitting or retired) of the Supreme Court/Chief Justice of a High Court as presiding officer and two other members having sufficient experience in insurance matters;

o Providing for a statutory appeal to the Supreme Court against the decisions of the IAT.

LIFE & NON-LIFE INSURANCE – Development and Growth!

The year 2006 turned out to be a momentous year for the insurance sector as regulator the Insurance Regulatory Development Authority Act, laid the foundation for free pricing general insurance from 2007, while many companies announced plans to attack into the sector.

Both domestic and foreign players robustly pursued their long-pending demand for increasing the FDI limit from 26 per cent to 49 per cent and toward the fag end of the year, the Government sent the Comprehensive Insurance Bill to Group of Ministers for consideration amid strong reservation from Left parties. The Bill is likely to be taken up in the Budget session of Parliament.

The infiltration rates of health and other non-life insurances in India are well below the international level. These facts indicate immense growth potential of the insurance sector. The hike in FDI limit to 49 per cent was proposed by the Government last year. This has not been operationalized as legislative changes are required for such hike. Since opening up of the insurance sector in 1999, foreign investments of Rs. 8.7 billion have tipped into the Indian market and 21 private companies have been granted licenses.

The involvement of the private insurers in various industry segments has increased on account of both their capturing a part of the business which was earlier underwritten by the public sector insurers and also creating additional business boulevards. To this effect, the public sector insurers have been unable to draw upon their inherent strengths to capture additional premium. Of the growth in premium in 2004-05, 66.27 per cent has been captured by the private insurers despite having 20 per cent market share.

The life insurance industry recorded a premium income of Rs.82854.80 crore during the financial year 2004-05 as against Rs.66653.75 crore in the previous financial year, recording a growth of 24.31 per cent. The contribution of first year premium, single premium and renewal premium to the total premium was Rs.15881.33 crore (19.16 per cent); Rs.10336.30 crore (12.47 per cent); and Rs.56637.16 crore (68.36 per cent), respectively. In the year 2000-01, when the industry was opened up to the private players, the life insurance premium was Rs.34,898.48 crore which constituted of Rs. 6996.95 crore of first year premium, Rs. 25191.07 crore of renewal premium and Rs. 2740.45 crore of single premium. Post opening up, single premium had declined from Rs.9, 194.07 crore in the year 2001-02 to Rs.5674.14 crore in 2002-03 with the withdrawal of the guaranteed return policies. Though it went up marginally in 2003-04 to Rs.5936.50 crore (4.62 per cent growth) 2004-05, however, witnessed a significant shift with the single premium income rising to Rs. 10336.30 crore showing 74.11 per cent growth over 2003-04.

The size of life insurance market increased on the strength of growth in the economy and concomitant increase in per capita income. This resulted in a favourable growth in total premium both for LIC (18.25 per cent) and to the new insurers (147.65 per cent) in 2004-05. The higher growth for the new insurers is to be viewed in the context of a low base in 2003- 04. However, the new insurers have improved their market share from 4.68 in 2003-04 to 9.33 in 2004-05.

The segment wise break up of fire, marine and miscellaneous segments in case of the public sector insurers was Rs.2411.38 crore, Rs.982.99 crore and Rs.10578.59 crore, i.e., a growth of (-)1.43 per cent, 1.81 per cent and 6.58 per cent. The public sector insurers reported growth in Motor and Health segments (9 and 24 per cent). These segments accounted for 45 and 10 per cent of the business underwritten by the public sector insurers. Fire and “Others” accounted for 17.26 and 11 per cent of the premium underwritten. Aviation, Liability, “Others” and Fire recorded negative growth of 29, 21, 3.58 and 1.43 per cent. In no other country that opened at the same time as India have foreign companies been able to grab a 22 per cent market share in the life segment and about 20 per cent in the general insurance segment. The share of foreign insurers in other competing Asian markets is not more than 5 to 10 per cent.

The life insurance sector grew new premium at a rate not seen before while the general insurance sector grew at a faster rate. Two new players entered into life insurance – Shriram Life and Bharti Axa Life – taking the total number of life players to 16. There was one new entrant to the non-life sector in the form of a standalone health insurance company – Star Health and Allied Insurance, taking the non-life players to 14.

A large number of companies, mostly nationalized banks (about 14) such as Bank of India and Punjab National Bank, have announced plans to enter the insurance sector and some of them have also formed joint ventures.

The proposed change in FDI cap is part of the comprehensive amendments to insurance laws – The Insurance Act of 1999, LIC Act, 1956 and IRDA Act, 1999. After the proposed amendments in the insurance laws LIC would be able to maintain reserves while insurance companies would be able to raise resources other than equity.

About 14 banks are in queue to enter insurance sector and the year 2006 saw several joint venture announcements while others scout partners. Bank of India has teamed up with Union Bank and Japanese insurance major Dai-ichi Mutual Life while PNB tied up with Vijaya Bank and Principal for foraying into life insurance. Allahabad Bank, Karnataka Bank, Indian Overseas Bank, Dabur Investment Corporation and Sompo Japan Insurance Inc have tied up for forming a non-life insurance company while Bank of Maharashtra has tied up with Shriram Group and South Africa’s Sanlam group for non-life insurance venture.

CONCLUSION

It seems cynical that the LIC and the GIC will wither and die within the next decade or two. The IRDA has taken “at a snail’s pace” approach. It has been very cautious in granting licenses. It has set up fairly strict standards for all aspects of the insurance business (with the probable exception of the disclosure requirements). The regulators always walk a fine line. Too many regulations kill the motivation of the newcomers; too relaxed regulations may induce failure and fraud that led to nationalization in the first place. India is not unique among the developing countries where the insurance business has been opened up to foreign competitors.

The insurance business is at a critical stage in India. Over the next couple of decades we are likely to witness high growth in the insurance sector for two reasons namely; financial deregulation always speeds up the development of the insurance sector and growth in per capita GDP also helps the insurance business to grow.

Discover the Top 15 Secrets of Successful Commercial Property Ownership!

1.) What’s Your Type?

There are many different types of commercial properties that you can purchase including:

o Office
o Retail Space
o Warehouse Facility
o Restaurant
o Commercial Condo
o Strip Mall

The first step is clearly defining what type of property you want to purchase and how you want to use it. The following information will help you maximize your investment dollars to get the best possible deal when purchasing your property.

2. Build Equity With Your Investment

Equity is Money

Building equity is the primary if not the ultimate reason to buy instead of rent a commercial property. Let’s face it. It’s money in the bank. In fact, it’s better than money in the bank because you can’t get the same kind of return on your money when it’s sitting in the bank as opposed to when you’re building equity. Moreover, if you choose the right financing for your commercial real estate purchase, you can not only build equity through ownership, but you can also leverage your capital saving in order to grow your business, hire additional employees, or even purchase an additional location when the time comes.

Owning beats renting because you can sell your investment once you outgrow the space or sell the business. Even if commercial property in your area has not appreciated (which is unlikely), you can recoup your investment by renting out the space once you move out and by selling when the time is right.

If you plan on growing into your building, buy something larger than your current needs, and rent out the extra space until you need it for expansion. This will provide you with steady income that you can use to help pay your mortgage or invest in your business.


3. Calculate Your Savings And Your Potential Profit

Lower Monthly Payments

Consider buying commercial real estate as a savings for your business. Real estate costs are the third largest business expense, behind payroll and taxes. Long loan amortizations mean that your monthly payments could wind up being less than what you would pay for rent, since landlords usually charge more than their monthly loan payment. In other words, owning your own commercial property may actually be more affordable, depending on current market conditions.

Ask your lender to provide you with an analysis of the current market in your area so that you can see which scenario is best for you (renting or buying). The lender should be able to explain your options in detail with examples of monthly rental costs vs. monthly loan payments and the benefits of each.

Analyze the Rent Value

Upon finding a property that peaks your interest, find out the status of the current tenants (if it is a multi-tenant property) in terms of how much rent they are paying. Check the current market to see if the rents are undervalued, meaning below what you can get in the current market. Your realtor or lender should be able to help you figure out how much you could charge for rent and determine how much of a profit you can make each month.

Tax Advantages

There are many tax advantages to becoming an owner of a commercial property. In most cases, you can deduct part of the value of the building at tax time, as well as improvements you’ve made as depreciation, which can save you more money on your taxes. Buying the property under your business or corporation’s name is also a better tax strategy than under your personal name.

4. Do Your Research

The more you can learn about property types and options, mortgages, financing, zoning and remodeling; the better position you’ll be in to make wise decisions concerning the acquisition of a commercial property.

However, you don’t have to know everything. That’s where putting together a powerful team of professionals proficient in their areas of expertise may be your most important step. Building a team of advisors – people you can trust to steer you in the right direction is critical to your success.

Understand Current Market Conditions

Keep your eyes open for news articles pertaining to the commercial real estate market. Is it “hot” right now? Is it a buyers’ or sellers’ market? What kinds of interest rates are available?

The Internet is a great place to start. Conducting a Google search for “commercial real estate market,” for instance, will give you results that include news and resources for national trends, analytics and market research.

In addition, many realtors, lenders and lawyers across the country offer free and timely articles on their websites that shed light on current commercial real estate trends nationwide. Again, make sure you listen to both sides of the story.

Tap Expert Resources

National market research companies can give you specific information about the area where you’re preparing to locate your business. You can also find information on demographics including the median age, household income, breakdown of ethnicities, and more from censuses available from the U.S. Census Bureau.

Also contact commercial lenders or realtors for additional resources. In looking for help, it’s usually better to talk to a lender or realtor with nationwide experience and up-to-date information than a small-time operation that might not have recent data for you. If the lender/realtor hasn’t gotten updated demographics since 1996, you’ve essentially wasted your time. Also, a lender or realtor that specializes in the type of property you’re looking for will be more likely to have the specific information you need, which will save you time in research.

Study the Current Vacancy Rate

Research what the vacancy rate has been over the past few years for the area you’re taking into consideration. If there seem to be high levels of vacancies, try to find why. Is it a bad neighborhood? Talk to store owners in the immediate area and find out how long they’ve been doing business there. Ask if they have any concerns that you as a potential property owner should know about the area.

Research Commercial Realtors

It’s important to research commercial realtors that specialize in the type of space you’re looking for. Grill the realtor you are considering selecting on the entire purchase process so you know what to expect. Ask how long the process usually takes so that there are no surprises. Check their references and their track record (more on finding a Commercial Realtor in #5).

Examine Experienced Commercial Lenders

Choosing a lender and financing program is just as important as choosing the property. Again, find out the entire process of financing, as well as your different options. Don’t assume that just because you’ve had a relationship with your bank for years that using their financing is the best choice.

Banks don’t always offer the lowest rate for commercial loans, and sometimes have a far longer turnaround than non-bank lenders. Some banks require that you transfer your accounts to them in order to qualify for a loan. Be aware of any stipulations when seeking a bank for a commercial loan.

5. Choose the Right Commercial Realtor

As mentioned before, you need qualified partners to help you with the process of buying commercial property. Start with a terrific commercial realtor.

Some commercial realtors work exclusively with individuals interested in investment properties. Others work with owners/users of commercial real estate, and among those some specialize in property management, which can be an added value to you.

Who Do You Know?

Referrals from trusted sources are usually the best way to find a good commercial realtor.

Ask Questions

Set up a meeting with more than one potential commercial realtor. Find out as much as you can about their professional background, education, and experience with your type of property. You can ask for a list of recent transactions to give you an idea of what they deal with on a regular basis, and how many properties they’ve actually sold in the last year or two. And most importantly, ask for client references (testimonials)! Real client feedback is the most effective measure for potential success.

The Right Match

Make sure you choose a realtor that understands your specific needs. If you are a small business, you don’t want to work with a realtor that normally handles multi-million dollar deals. Your project may become less of a priority when that particular realtor gets a bigger commission to worry about.

6. Consider Your Time Frame

If the reason you are looking for commercial property is because your lease is ending, think twice before jumping into a decision you might regret. Finding just the right space, securing financing and going through the process of obtaining a commercial property can take months. If you don’t have that kind of time, you may need to rent month-to-month for now.

Take Your Time

While you may be in a hurry to move into a space, take your time. Buying any kind of property is a major decision, and buying commercial property is even more important for the development and growth of your business. Selecting a property in the wrong area, or a space that doesn’t allow you to grow can hinder your company and even cause it to fail, so plan carefully.

If the realtor or lender gives you an estimate of three months from start to close, plan for longer – just in case. Keep in mind there are many people involved in the process of buying property, from the seller, realtor, lender, appraiser, surveyor, paperwork approvers, secretaries, and more and this process can often take slightly longer.

7. Location, Location, Location

One of the most important factors in considering commercial property is location. If a property is located on a busy corner that is difficult to get to, your business may not do well (in fact, that’s probably why the property is for sale). If you want to operate a dog kennel and the property you’re considering is in a residential area, not only will your business disturb the residents, the zoning laws may prevent you from operating there.

Foot Traffic

For a retail business, look for areas with high foot traffic that will give you the exposure and increased walk-ins you need to be successful.

If you are looking for an industrial or manufacturing facility, then you can stay out of the retail limelight and buy something in a warehouse district. These areas are usually cheaper than retail space.

Easy Access

Make sure your location has easy access from the road. Look to see if the site is at a difficult intersection. Is there construction going on that seems like it won’t be ending any time soon? On the other hand, what’s the potential once the construction is completed?

Check out the Competition

If you want to open a bistro in a neighborhood that has several bistros, you might want to try somewhere else with less competition. However, a healthy population of restaurants usually means a healthy population of customers.

Know Your Customer

Find out the demographics of the area you’re interested in. If you want to move your sports apparel shop to a new location, you’ll probably want an area with a high percentage of youth and active adults. An urban area with a lot of pedestrian traffic might be better for this kind of retail shop than a suburban area in a retirement community.

8. Free Parking

We’ve all spent time driving around and around looking for a parking spot. It can be very frustrating, especially when you’re running late. Whenever possible, you want a location that has ample parking for your visitors.
If you have a retail store, restaurant, or other high-traffic business, estimate how many customers or visitors you’re likely to have at any given time and consider rejecting any properties that have fewer available parking spaces than your estimates. Again, use your best judgment and consult your realtor.

Avoid Headaches

Also pay attention to how your parking is situated. If it’s located just off a major road, it may provide a headache for people trying to back out of the parking space, and may even cause accidents. When visiting the property, see how well you can maneuver the parking. If it’s a hassle for you, it will be doubly so for a potential customer or visitor.

9. Get in the Zone

Before you begin the negotiation process for a commercial property, make sure to investigate the zoning laws, as well as what types of businesses you are able operate there. There are zoning laws about the type of business that can be conducted in certain spaces.

For instance, some spaces do not permit food and beverage to be served, or may have restrictions on how late a business can operate. The typical zoning districts in most cities include: residential, commercial, industrial and mixed-use.

Don’t Assume

Zoning can be tricky, so do your due diligence on this topic. Don’t assume that just because the previous tenant of the space had a restaurant that the property you’re looking at is necessarily zoned for food and beverage. Many businesses slide under the radar for months or years while violating zoning laws. Making assumptions can cost you big time and big money when it comes to zoning.

Regulations

Zoning laws can regulate not only the type of business that can operate, but also parking, signs, water and air quality, waste management, noise, appearance of building and more. Find out any and all regulations regarding the property in advance.

Visit your local library or zoning office to get information on all the zoning laws, rules and regulations that apply to the property you’re considering for purchase. Talk to people at the zoning office if you have concerns or questions prior to making the investment. Ask your realtor to double-check your efforts to ensure you’ve covered all your bases.

10. Inspection

Normally, if you are considering buying a home, you have an inspector look at the structure, pipes, electrical system, etc. A commercial property requires even more of a stringent inspection, not only to meet your needs, but also the requirements of the local government.

Before purchasing commercial property, hire professionals to thoroughly examine the electrical system, including the sprinkler and security system, as well as the plumbing, phone, and Internet systems. Since you will have already done your homework on zoning and regulations, you will be aware of the building codes. With the results from your various inspections you can get an estimate of how much work, if any, will need to be invested in order to get the building “up to code.”

A Good Foundation

Hire an architect or engineer to examine the foundation and structure, especially if you have frequent natural disasters such as earthquakes or hurricanes in your area of the country.

Communication

If you are looking at an older building, there may be quite an investment up front to either meet city standards or meet your own standards. Don’t overlook the importance of a high-tech phone and Internet system, especially if you have a lot of employees. If there is not already a T1 or fiber optic network in place, build this cost into your purchase, as it will save you money and headaches in the long term over more traditional (and older) phone and Internet systems.

Make sure to hire an expert to tell you if the changes you need are possible and within your budget. With most commercial real estate loans, you can include these remodeling costs in your financing. Again, make sure to ask.

11. Map Out Your Plan

As a business owner, you understand the importance of carefully planning every move. Buying a property requires no less preparation. Before you begin looking for a building, sit down with your finances and figure out how much of a mortgage you can afford to take on.

Create a Budget

When calculating your budget for buying property, don’t leave out taxes, insurance premiums, and repair and maintenance, as well as costs involved in customizing the space to meet your needs. Failing to create a budget for these often overlooked expenses will quickly put you in the hole with your new property. If you need help creating this budget, ask your realtor or your commercial lender for advice.

Room to Grow

To determine the amount of mortgage you can afford, assess your income and expenses. Your mortgage and property expenses should leave you enough room to operate your business without cutting into your normal expenses.

Sometimes it is necessary to take a cut in profit in order to purchase the kind of space you need to grow. Think of it this way: buying a larger space will allow your company to stretch its wings, which will result in more profits down the road. It’s a risk you sometimes need to be willing to take if you want to grow. Remember, if you buy more space than your company needs immediately, you can acquire tenants who will provide rental income that can significantly offset your monthly mortgage obligation.

Planning Ahead

It’s almost always a good idea to buy slightly more room than you currently need. You can lease out the additional space until you need it. If this is your plan, map out how this will bring in income to help subsidize your mortgage. Remember, however, that you may have periods when some of the space is unoccupied, so don’t rely on the rent coming in to cover your mortgage every time. Make sure you can cover the mortgage on your own.

Have an Exit Strategy

So, how does it all end? Hopefully with big dollar signs. After all, that’s why you’re investing, isn’t it? To eventually cash in on your investment. Therefore, you need to have an exit strategy.

You might choose to hold onto your commercial property through retirement, as real estate is a great asset that can provide you with a steady passive income stream: a lucrative retirement strategy.


12. Before You Sign on the Dotted Line

Having a carefully drafted contract is key in your commercial real estate deal. You are required by law to have a written sales contract, and it is to your advantage to have one with each detail of the transaction documented.

Also, make sure to leave ample time for due diligence and closing, especially if any construction is involved!

Details

Despite the stories of real estate contracts being thicker than phone books, all you really need is a contract that lays out the important elements of your agreements. First, it needs to describe the property and the purchase price, as well as whether the price is due at closing or in installments.

Equipment, etc.

The contract should include any equipment, machinery, or personal property that is included in the purchase price. It should list any contingencies that must be met prior to completing the purchase. A common example of a contingency is whether you are able to obtain a loan to finance the purchase.

Don’t Forget…

The contract should cover how the property taxes and utility bills will be pro-rated between you and the seller, as well as what type of title insurance you must provide. The date for closing and delivery of possession should be in the document, as well as what legal recourse either the buyer or seller has in the event that the other party defaults on the agreement.

And Always…

Once the contract has been drafted, have a lawyer review it prior to signing it. A lawyer may be able to help you negotiate a better deal than what is originally presented.

Unfortunately, not all property sellers are honest, and some will try to hide their true purpose in technical legalese within a contract. Having a trusted lawyer and commercial realtor review your contract will keep you safe in your transaction.

13. Choose a Lender with Care

There are many types of lenders available to assist you with your commercial real estate financing. But keep in mind: not all are created equal. Do your homework in finding a lender that meets your specific needs.

It’s important to find a firm that can give you broad access to capital, understand your priorities, offer you the best deal on your loan and complete the process in a timely manner.

Types of Lenders

There are three basic categories of lenders: direct lenders, indirect lenders and hybrid lenders. Direct lenders lend their own funds. Some examples of direct lenders include commercial real estate lending institutions, banks, and private lenders. Indirect lenders place funds on behalf of others, and include mortgage brokers and mortgage bankers, as well as financial intermediaries. Hybrid lenders both lend their own funds and lend on behalf of others, and include certain investment banks, investment advisors and credit companies.

Banks usually generalize in services, and offer a wide array of products. While this may sound good, think about it for a moment. Would you rather have a lender that knows a little about many financing options, or a lot about three or four products designed specifically for you?

Lending institutions are more specific in nature, and are experts in the products they offer. Banks are more traditional in their financing products, while lending institutions are more entrepreneurial and creative.

Banks often require that you move all of your financial relationships under their umbrella, including deposits, LOCs, etc., while non-bank lenders only work with your real estate loan.

The U.S. Small Business Administration (SBA) is a great resource for small companies looking to expand their business or purchase real estate for commercial use. The SBA offers tools that can help you plan your next move, as well as loan programs for a variety of business purposes. The SBA itself does not offer loans, but works through banks and non-bank lenders to provide small businesses with loan programs that meet their needs.

Get Started Early

It is important to choose your lender early in the process so that you can maximize leverage and get a lower cost of funds. Your lender will ask for certain forms in order to determine your eligibility for financing, as well as to figure out what kind of deal you can negotiate.

You will need to provide your income and expense statement, balance sheet and personal financial statements from all prospective owners of the property. If you don’t have them written already, you will need to create profiles of the management team, including information on education and employment background, as well as experience relevant to your business. Other documents needed include a property appraisal, contract of sale, and plans for the use of the property. Providing these documents early can help streamline the process. Again, your realtor and lender will help you through the process.

14. Know Your Financing Options

While you are in the “shopping” phase of looking for a commercial property to purchase, you should begin to research your financing options. There are many kinds of commercial financing options available, so it is important that you find the one that best suits your needs. It’s also very important to know how much you’re qualified to borrow. This will help you and your real estate broker find the right type of property for you faster.

No matter what type of loan you wind up getting, negotiating the loan will be based on the same basic factors: anticipated use of the property, expected returns from the property or business conducted there, geography, type and size of real estate, perceived risk to lender and market conditions. There is no one rate applicable to all commercial financing. The rate you receive will be based on your specific situation.

If interest rates are low, securing a low fixed rate will mean you pay less interest over the entire mortgage. A variable rate, which is considered by some to be more risky, can give you a lower payment for a period (before it increases), which will let you use the money saved for other investments.

In weighing your financing choices, remember that some debt is good. Don’t assume you should take the loan with the highest down payment requirement so you can “pay off your debt faster”. Putting down more money means you have less to invest in your business.

Term Loans

Based on how much money you need to borrow, there are different financing options available. One option is a term loan. Term loans can be used for a variety of purposes, including financing permanent working capital, new equipment, refinancing, expansion, acquisitions and, of course, buildings.

There are loans specifically designed for commercial real estate or equipment. Banks typically lend up to 80% of the value of the real estate to be financed, and the loans must be repaid in 15 to 20 years. If you are able to come up with the remaining 20% on the cost of the property (and don’t have anywhere better to invest the money), this is an option to consider.

Up Up and Away

Beware of balloon payments. While paying a very low monthly amount at the start sounds great, you often end up spending additional money to refinance your commercial mortgage as lenders reset interest rates or reexamine you and your business over the life of the loan.

Credit Line

If you want a more flexible loan, you may have the option of a credit line that can provide you with cash on an as-needed basis, up to a cap amount. Credit lines almost always have a variable rate, and have interest-only payments for the first one to three years.

Equity Financing/Joint Ventures

Equity financing involves joint ventures with investors that have the capital you need. Usually, the investor will receive a percentage of your business’ profit in exchange for the capital you need to purchase the building or stock in the company if it is public.

Some investors will take a back seat to your executive decisions, while others will want a say in the operation of your company. Joint ventures are not for everyone, so keep in mind all of these factors when considering one.

The SBA 7(a) Loan Program

The SBA has a variety of financing products that are ideal for small businesses. The most commonly used SBA loan is the 7(a) Loan Program. The loan is provided through banks or non-bank lending institutions.

In order to be eligible for a 7(a) loan, your business must be for profit, and you cannot purchase real estate for investment purposes. There are many other guidelines to qualify for a 7(a) loan. The maximum amount a business can borrow from a 7(a) loan is $2 million. Furthermore, all SBA 7(a) loans have prime-based floating interest rates. This type of interest rate structure can leave you vulnerable to monthly/quarterly interest rate swings that can have a significant impact on your monthly mortgage payment.

Now you can see why it is so important to find a commercial lender who can help you digest all of this information and take the time to explain your options.

15. The Best Kept Financing Secret

One of the main reasons small businesses choose to rent instead of purchase their own commercial real estate property is the perception that they can’t afford the down payment. Many of them are not aware that SBA-guaranteed loans are available to qualifying applicants and can provide up to 90 percent loan to cost financing.

In fact, the 504 loan program was designed to assist small businesses in building or purchasing properties while spurring business growth in the local economy.

Only 10% Down

While in some parts of the country, use of the 504 loan program is widespread, there are other areas, such as those east of the Rocky Mountains, where this program isn’t getting the attention it deserves. If you are unable to put down much of the loan cost, the 504 is worth looking at: it only requires 10% – and there are no closing costs in addition to the 10% down! (Please note that there are certain basic criteria you will need to have to qualify for the 10% down program. A good lender work with you to do his or her best to help you qualify for this benefit.)

The other 90% of the financing comes from two places: up to 50% of the total cost (land, building, renovations, and soft costs) is paid for by a senior lien from a private-sector lender, and up to 40% comes from a junior lien from a Certified Development Company (this portion is backed by a 100 percent SBA-guaranteed debenture).

Smaller Payments

Since most banks and loan programs require a minimum of 20-30% of the property cost, and do not fold in soft costs and closing fees, 504 loans are a great way to get the best of everything: by paying only 10% down, you retain more capital and are able to make smaller payments over the life of your mortgage.

Because you have two separate loans with the 504, you end up getting a blended rate that is below market. The first loan is either fixed or variable, and is at or slightly higher than conventional financing rates. The second mortgage (the 40% loan) is considerably lower than market interest rates, and is fixed for the life of the loan. Having a lower interest rate lets your company retain more capital.

504 loans can close in 30 days or less, saving you time, and helping you get into your new property sooner. Another advantage is that there are usually fewer “hoops” to jump through to get approved, as long as you are dealing with a lender who specializes in this type of loan as opposed to one who might process one or two a year. The specialist knows this loan inside and out and can streamline the process, as well as make sure you are receiving all the benefits.