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Commercial Core Law3 Hours CE
Florida Realtors® Copyright© 2015
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Objectives• To recognize and distinguish between a
commercial transaction and a residential transaction
• To understand the basic premise of the license law as it pertains to the brokerage of commercial real estate
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Objectives
• To understand the contents of an industry listing agreement for either a lease or purchase
• To understand the purpose of a Letter of Intent and Confidentiality Agreements
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Objectives• To understand the contents of an industry
purchase contract for either a lease or purchase
• To understand why there is not an industry commercial lease form
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Objectives• To understand the disclosure requirements in a commercial transaction
• To appreciate and apply general concerns in a commercial real estate transaction that do not occur in residential transactions: ADA, commercial tax, long term agreements, assignments, the role of an attorney in a commercial transaction, income/expense reports, rent rolls, sub leases.
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Brief Overview• There is a fundamental difference in the legal
aspects of commercial transactions and residential ones.
• Article 11 of the REALTOR® Code of Ethics is devoted to the concept of competence and how a REALTOR® must ensure they are skilled enough at a particular kind of real estate before undertaking to practice it.
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Brief Overview
• From listing to closing the entire transaction is different in practice as well as how the courts view them legally.
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Lease(s)• A residential lease agreement is a contract
between an individual tenant and the landlord to use property for living arrangements
• Where a commercial lease is a contract between a business tenant and landlord for use of commercial property with the purpose being to generate a profit or a tax write off to the owner
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Purchase(s)
A residential contract is not usually appropriate to use for commercial purposes, because there are certain things commercial buyers and sellers want to do that the standard residential contract does not cover, such as:
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Purchase(s)• Delayed or second deposit• Particular documents from the Seller• Extended inspection periods• Specific representatives and warranties• Commercial Closing Considerations• Brokerage fees and other closing costs such as
attorney’s fees
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Chapter 475
Chapter 475 applies to all Residential and Commercial Licensees. Specifically, 475-61J2 as follows:
• 61J2-1.011 License and Examination Fees
• 61J2-2.027 Applications by Individual
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Disclosure Requirements in a Commercial Transaction
Scenario: You own a commercial building which has been on the
market for over two years. After anxiously waiting, a potential
buyer shows interest in the property. There is just one problem
you know that the building needs a new roof based on the leaks
you have discovered a few days ago. Do you, as the commercial
property owner, have a duty to disclose this problem to the
potential buyer?
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Disclosure Requirements in a Commercial Transaction
There is no affirmative duty to disclose material
facts which impact the value of the property
however, you cannot actively conceal the alleged
problem in order to prevent the purchaser from
discovering it through independent inquiries or
investigation
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Disclosure Requirements in a Commercial Transaction
The buyer must have an equal opportunity to become aware of the problem
If you disclose part of the problem, you must disclose the full extent of the issue
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Disclosure Requirements in a Commercial Transaction
Florida law will generally impose a duty to disclose the issue if there is a fiduciary relationship between the parties
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Cooperative Compensation Agreements
There are some distinct differences between
commercial and residential transactions that
practitioners need to observe to ensure they
are paid their commission.
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Cooperative Compensation Agreement
There is no standard cooperative commission for
any commercial transaction. Separate
commission agreements between brokers are
recommended to ensure the terms of
compensation are clear.
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Broker Lien Law
Florida Statutes § 475.705(3) (2012)
•Does not permit a lien on title, only on the
proceeds.
•A licensee can’t opt out of adhering to this law in
order to get a listing
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Broker Lien Law
Broker is required, within 30 days after a commission
is earned, and at least one day prior to the closing, to
deliver a statutorily proscribed commission notice to:
1. The property owner
2. The closing agent
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Broker Lien Law
Should a broker fail to deliver a copy of a commission
notice within the required time period the law calls for;
then the broker shall not be entitled to enforce the
broker’s lien. There is an exception to this provision if
the broker’s failure to deliver the notice is because the
owner entered into a contract for the sale/lease of the
property without the knowledge of the broker.
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Broker Lien LawException to the provision:
If the broker did not have notice then the broker
may then enforce the lien for a commission if (1) a
copy of the commission notice is delivered to the
owner and the closing agent before the closing
agent disburses the owner’s net proceeds; and
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Broker Lien Law
(2) the broker executes and delivers to the closing
agent a sworn affidavit stating that the copy of the
commission notice was not delivered within the time
period specified in the Act because the owner entered
into a contract for the sale/lease of the commercial
real estate without the broker’s knowledge.
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Commercial Listing Agreements
To be entitled to a commission you must have an
“employment” contract which may be a listing
agreement with a seller or an employment
agreement with a buyer.
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Commercial Listing AgreementsTraditionally brokers use one of three types of listing agreements:1.Exclusive Right of Sale2.Exclusive Agency3.Non-Exclusive or Open Listings
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Exclusive Right of Sale• Most widely used
• Seller agrees to pay the listing broker a commission
• The listing agreement should spell out whether the listing will be placed in either an MLS or Commercial Exchange
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Exclusive Agency• Allows the seller to sell the property without owing a
commission to the broker
• Potential prospects may circumvent the listing broker
which results in procuring cause disputes
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Exclusive AgencyPossible procuring cause “fix”:
This property is listed with a broker under an agreement that the
broker will be paid a commission for procuring a buyer for the
property. Buyer warrants to the seller that he or she has not been
shown or made aware of this property by any real estate broker or
sales associate. Buyer agrees that if information to the contrary is
proven by a broker claiming a commission, the buyer will reimburse
the seller for commissions due to said real estate broker, as well as
legal fees.
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Non-Exclusive or Open Listing• Broker finds a ready, willing and able buyer
• The seller may enter this type of agreement with several brokers
• Broker that brings the offer that is accepted by the seller is entitled to the commission
• Either party may terminate an open listing
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Activity:Review the Exclusive Right of Sale Listing Agreement
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Terms and ConditionsCommercial listing agreements vary in their scope and intent. Items to consider in the listing agreement:
•Identified Prospects•Price•Services Broker Shall Provide
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Terms and ConditionsItems to consider continued:•Compensation Agreement•Owner’s Covenants•Termination Rights•Indemnification
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All terms of any listing agreement are negotiable
and may differ depending on the nature of the
property. An office building’s listing agreement
may look very different than a listing agreement
for an industrial factory.
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Commercial Purchase ContractPreparation of the commercial real estate purchase
agreement provides an essential outlet for
negotiation and clarification of terms of the
transaction that your client may not have considered
when they began the transaction. Attention to detail
is vital. Some things to consider are:
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Commercial Purchase Contract• Escrow Deposit• Due Diligence Period• Existing Liens, Taxes, FIRPTA, Zoning• Assignability• Legal Proceedings
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Activity Review the article:All Appropriate Inquiries in Commercial Real Estate Due
Diligence: What Inquiring Minds Need to Know
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Role of the AttorneyAn experienced attorney can help navigate the process by ensuring:
1. Legally Binding Contract2. Clear Title3. No Encroachments and Clear Surveys4. Tenant Rights and Assignment5. Delayed Closing6. Options
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Preliminary AgreementsLetters of IntentA letter of intent has many other names:
1. Term Sheet2. Memorandum or Understanding3. Agreement in Principle4. Binder5. Commitment Letter
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Letters of Intent
Regardless of the name, the function is the same. To outline the basic terms of the transaction. What differs is the intended use, binding or non-binding.
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Letters of Intent
• Is the letter of intent binding or non-binding?
• How would you decide on binding or non-binding?
• What should be included in the letter?
• What harm can happen from a simple letter of intent?
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ActivityScenario:A commercial broker who was new, but not a rookie. A Letter of intent for commercial building was executed between the parties without a confidentiality agreement. The buyer broker was surprised at the level of detail the listing broker wanted included, but thought it would make the contract that much easier.
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Scenario continued:Their offer, although accepted through the execution of a letter of intent, was 20% below list price. The letter specifically stated that the letter of intent was not binding unless the parties executed a full purchase contract by a date certain.
How Did This Go Wrong?
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The Listing broker took the letter of intent and shopped it
around to other investors. When the buyer asked for an
extension of due diligence the seller said “no, not unless
you want to renegotiate the price.” The buyer declined
and came to find out that a competing offer was
immediately accepted when they cancelled. The offer was
based on the comparison to buyer # 1’s letter of intent.
Scenario continued:
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Discussion
• How could this have been prevented?
• What are the dangers?
• How could this be solved?
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Confidentiality/Non-Disclosure• A confidentiality agreement is often the first
step in a commercial transaction• These agreements are rarely “one size fits all”• Two Major Pitfalls
– List everything but the kitchen sink as confidential– Fail to provide any procedures for identifying the
confidential information
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Confidentiality Agreement akaNon-Disclosure Agreement
Often is the first step in a commercial real estate transaction.
Florida Realtors forms library contains a sample form.
These agreements are rarely “one size fits all.”
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Confidentiality Agreement akaNon-Disclosure Agreement
Two Major Pitfalls:1.List everything but the kitchen sink as confidential, and2.Fail to provide any procedures for identifying and handling the confidential information.
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Confidentiality Agreement akaNon-Disclosure Agreement
The primary purpose behind a non-disclosure agreement is to protect the disclosing party’s valuable secrets, ideas and sometimes their identity.
A “one size fits all” non-disclosure agreement may prevent a court from enforcing that very agreement.
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Activity
Review the Florida Realtors Confidentiality/Non-Disclosure Agreement
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Scenario:
A buyer and seller begin negotiating on the purchase of a strip mall with
an anchor store that is vacant and seven smaller stores, six of which have
current leases but three are set to expire in less than three months.
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Scenario:
The buyer is a large discount chain store that does
volume rather than quality. Some of the tenants are
high end merchants who sell specialty items like art and
clothing. As the parties begin to negotiate will the
Florida Realtors CNA agreement work for them? Why
or why not?
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Analysis:
The Confidentiality and Non-Disclosure
Agreement does not bind the seller. That's not
what it was designed for. So if buyer wanted to
bind seller to a confidentiality agreement, buyer
would need to negotiate that with seller.
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Analysis:
At a minimum, before agreeing to buyer's
demands for a mutual confidentiality agreement, I
would want the seller to review its leases with the
smaller stores to ensure that such non-disclosure
would not be a breach of any of those leases.
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Commercial Leases and the Unauthorized Practice of Law
The Standing Committee on the Unlicensed
Practice of Law recommended that the Supreme
Court of Florida adopt a residential lease from
that could be completed by nonlawyers.
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Commercial Leases and the Unauthorized Practice of Law
The approved forms applied to residential leases of up
to one year in duration. However, when approving the
forms, the Court further stated that “[t]he approval of
these forms in no way authorizes a non-lawyer to give
legal advice, to draft leases or to prepare addenda to an
approved lease form.”
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Common Provisions in a Commercial Lease
“Common” doesn’t really apply to commercial leases. Things to consider:•Expense Stop Provision•Legal Representation•Damage and Destruction
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Financial Information Exchange in a Commercial Transaction
Buyers are inclined to view all of the current financial
statements surrounding the operating of the business
and what income the property will derive. This
information, sometimes known as a rent roll or income
statement, is usually part of the confidential
information that is provided as part of due diligence.
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Financial Information Exchange in a Commercial Transaction
Documents:•Rent Roll•Income Statement•Square Footage Usage•Tax Payments•Assignment
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Activity:Refresher on Sales Tax on Commercial Leases
from The Florida Bar Journal
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MLS Inclusion
Two Types of Commercial Property Services:1. Commercial MLS2. Commercial Information Exchange
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Commercial MLS
Authorized participants make unilateral offers of
compensation to other participants acting as
subagents, buyer agents or in other capacities as
defined by law.
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Commercial MLS
Offers are unconditional except that entitlement
to the compensation is determined by the
cooperating broker’s performance as the
procuring cause of the sale/lease.
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Commercial MLS
Any REALTOR® (principal) is eligible to
participate in the Service upon agreeing in
writing to conform to the rules and regulations
of the Service and to pay the costs associated
with participation.
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Commercial MLS
Eligible property types (depending on local
rules) include: subdivided vacant land; land and
ranch; business opportunity including some
interest in real property; hotel/motel mobile
home parks; commercial income industrial;
investment; and office space.
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Commercial MLS
The participant agrees to arbitrate disputes
involving contractual issues as well as specific
non-contractual issues as defined by Standard of
Practice 17-4 of the REALTOR® Code of Ethics.
Brokers can agree not to arbitrate.
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Commercial Information ExchangeA CIE is an information exchange that participants
who have been retained by sellers of commercial
property can market those properties. The CIE is also
available for participants that have been retained by
buyers of commercial property to submit information
on the type of property being sought.
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Commercial Information Exchange
With no offers of compensation or cooperation,
the CIE is not an MLS. Any agreement to
compensate would be made on an individual
basis outside of the CIE by the participants
involved in the transaction.
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Commercial Information Exchange
Like the Commercial MLS, the Commercial
Information Exchange is available to any
REALTOR® (principal) upon agreeing in writing to
conform to the rules and regulations of the CIE
as well as paying the costs involved with
membership.
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Commercial Information Exchange
Participants working with a buyer looking for
property may submit information describing
what the buyer is looking for even though the
participant may not be the exclusive agent.
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Commercial Information Exchange
Types of properties eligible for submission are
the same as for the Commercial MLS. These
may include: subdivided vacant land; land and
ranch; business opportunity; motel/hotel;
industrial; investment and office space.
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Commercial Information Exchange
Each Participant agrees to arbitrate disputes
involving contractual issues and questions, and
specific non-contractual issues and questions as
defined in Standard of Practice 17-4 of the
REALTOR® Code of Ethics. Brokers can agree not
to arbitrate.
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Individual Compensation Agreements• Compensation, like everything else in real estate is
negotiable
• The type of compensation you receive depends on the market, your company and what you negotiate for yourself
• The compensation structure in a commercial transaction is more complicated than in a residential transaction
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Individual Compensation Agreements
ActivityScenario: A commercial broker lists a large office building for rent. A tenant representative presents a tenant, a confidentiality agreement is executed and negotiations begin. A compensation agreement between the brokers was executed that offered X% for a tenant representative over the first five years.
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Individual Compensation Agreements
Scenario continued: If the deal is for ten years, however, that drops to Y%. Renewals would be half the amount of the original payment. There was no mention of the timing of payments. At the time a ten year lease was executed for the entire building by the tenant and landlord the tenant representative asked for the full amount of the commission.
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Individual Compensation Agreements
Scenario continued: The landlord disagreed and said “no, my agreement with the landlord is that all commissions are paid by the landlord over the course of the lease and broken into two separate payments, one at lease signing and one at the end of two years.
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Individual Compensation Agreements
Scenario continued: A check for the first five years was presented to the tenant representative. The full commission was over $60,000, so the tenant representative feels he has been shorted a full $30,000.
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Individual Compensation Agreements
• What went wrong in this scenario?
• How could it have been prevented?
• Is there any question the tenant representative will not get the additional $30,000?
• What are some options to solve this dispute?
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Legal Issues Unique to Commercial Transactions
Property Condition Disclosure• Caveat Emptor still applies to commercial
transactions• Purchasers are assuming the risk• The sales contract should address issues that may
arise and the options for relief• The buyer should use due diligence to discover
latent defects
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Legal Issues Unique to Commercial Transactions
According to Florida License Law: real estate brokers and salespersons duties include “[d]isclosing all known facts that materially affect the value of residential real property and are not readily observable to the buyer.” FS§475.278 However, there has been no line between commercial and residential property provided by the courts for guidance.
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Activity:Review the article Return of the Pink Panther
from The Florida Bar Journal
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Legal Issues Unique to Commercial Transactions
Americans with Disabilities Act
Public Accommodations and Commercial Facilities
(Title III) prohibits discrimination on the basis of
disability in the activities of places of public
accommodations and requires newly constructed or
altered place of public accommodation to comply with
the ADA Standards
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Public Accommodations and Commercial Facilities
Fall into one of 12 categories listed in the ADA,
such as restaurants, movie theatres, schools and
privately owned non-residential facilities such as
factories, warehouses and office buildings
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DiscussionScenario:Your office is in a home built in 1935 and it is not ADA compliant.
Are we doing wrong?
Many commercial offices are in older homes, how do you answer questions like this if they come up?
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§ 36.201 General Requirements
Prohibition of discrimination. No individual shall be
discriminated against on the basis of disability in the full and
equal enjoyment of the goods, services, facilities, privileges,
advantages, or accommodations of any place of public
accommodation by any private entity who owns, leases (or
leases to), or operates a place of public accommodation.
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§ 36.201 General Requirements
Landlord and tenant responsibilities. Both the landlord who
owns the building that houses a place of public accommodation
and the tenant who owns or operates the place of public
accommodation are public accommodations subject to the
requirements of this part. As between the parties, allocation of
responsibility for complying with the obligations of this part may
be determined by lease or other contract.
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The following links contain helpful information for licensees to share with prospective owners, buyers, landlords and tenants:
http://www.ada.gov/regs2010/smallbusiness/smallbusprimer2010.htm#compliance
http://www.realtor.org/field-guides/field-guide-to-complying-with-the-americans-with-disabilities-act-ada
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Record KeepingChapter 475 subsection 475.5015 clearly states that records:for at least 5 years from the date of execution by any party of any listing agreement, offer to purchase, rental property management agreement, rental or lease agreement, or any other written or verbal agreement which engages the services of the broker.
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Conclusion
Comparing commercial real estate transactions to residential real estate transactions is like comparing apples to oranges. They are in a similar genre and have the same licensing requirements, but that is where the similarities end
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Conclusion
• Commercial Real Estate transactions are business focused. It involves property that is sold, leased or used to achieve a predetermined business objective
• The selling process often hinges on numbers and return on investment
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Conclusion
• Residential Real Estate transactions traditionally involve clients looking for home for themselves
• For the most part is an emotional purchase with little thought about the return on investment
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Conclusion
For consumers considering investing in commercial real estate, it is best for them to work with a trained, experienced commercial real estate agent
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Thank YouDon’t Forget to Sign Out for CE!