Frequently Asked Questions - Commercial Real Estate

Commercial Real Estate Information Center

Frequently Asked Questions - Commercial Real Estate

Q: Is there a difference between commercial real estate and residential real estate?

A: The main difference lies in the amount of legal control that exists over residential real estate. For example, there are state laws that control the habitability of residential real estate. Commercial real estate leases and sales are based more on contract and the negotiating parties are given more negotiating latitude than in residential real-estate sales or leases. Other differences lie in the areas of zoning and land use, bankruptcy, financing, tax treatment, and the relative scales of projects.

Q: What is a mortgage?

A: A mortgage is a financing tool used to buy real estate. There are two parties, the mortgagee or mortgage holder, and the mortgagor or mortgage debtor. The mortgagee is the party loaning the money for the real estate, most often a bank. The mortgagor is the party receiving the loan in order to purchase the property. The transaction is secured by the real estate itself. If the mortgagor defaults on the loan, the mortgagee can initiate foreclosure proceedings in order to reclaim the property.

Q: What is foreclosure?

A: Foreclosure is the legal process of reclaiming the real estate that is the security interest for the mortgage. If there is a default on the mortgage payments, then the lender can attempt to reclaim the property to cover the remaining loan balance. Generally there is a clause in the mortgage that requires, upon default, the payment of the entire mortgage and interest, and if the borrower cannot pay in full, foreclosure is the lender's remedy. State law governs most aspects of foreclosure.

Q: How would bankruptcy affect commercial real estate holdings?

A: Bankruptcy law as it impacts commercial real estate matters is extremely complex, especially considering recent changes to federal bankruptcy law. Anyone, debtor or creditor, with commercial real estate interests potentially affected by bankruptcy, should seek the advice of competent legal counsel to understand how to preserve important rights and how to navigate the maze of potentially applicable laws.

Q: What is a mechanic's lien?

A: A lien is a creditor's interest in property to secure a debt. A construction contractor often establishes a mechanic's lien for labor and/or materials provided when improving real property if there is a chance of nonpayment. The basic policy of mechanic's liens is that the real estate owner should not benefit from work that enhanced the property without properly paying for the improvement.

Q: What is zoning?

A: Zoning is governmental control over the use of real estate. Local, state, or federal government can assert the control, but it is usually exercised by local government. Zoning often encompasses issues such as land use, building specifications, and environmental impact. For example, local government can require that certain property be used only for industrial purposes.

Q: How are zoning ordinances changed?

A: Local zoning ordinances are changed through administrative proceedings. The government may rezone particular property or amend a particular zoning ordinance. An option for a landowner seeking to use property in a way forbidden by the applicable zoning law is to apply for a variance. A variance is an exception to the zoning ordinance granted to an individual party. Often the process of receiving a variance requires an administrative hearing, public disclosure, and community input.

Q: What federal laws have an impact on commercial real estate?

A: Real estate has been traditionally governed by state law, but federal law now permeates many aspects of commercial real estate. Important areas of federal control are in tax law, bankruptcy, finance and banking regulation, and antitrust. Additionally, federal environmental laws have a huge bearing on commercial real estate. For example, the Clean Water Act and the Endangered Species Act both can impact land use and development in environmentally sensitive areas, and federal law also intensely regulates past and future property contamination and pollution.

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.

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