The real estate market is booming in the Arlington and DFW area. You need real estate attorneys with the experience to represent your interests in real estate matters. Practicing law since 1972, Kris Landrith is Board Certified in Commercial Real Estate by the Texas Board of Legal Specialization. Our attorneys will provide practical and effective legal representation to you or your business. Give us a call today to schedule a time to discuss your real estate law needs.
What types of services can our real estate attorneys provide?
Real estate law has complexities that are not covered by general contract law. Due to the large investment in real estate, it is important to make sure your interests are represented. Our attorneys provide advice to individuals, local businesses, national companies, universities, government agencies, financial institutions, churches and investors so we can help you or your business. Some of the ways that Jackson, Landrith & Kulesz, PC attorneys can advocate on your behalf:
- Purchase and sale of property
- Review title commitments, surveys and closing documents on client’s behalf
- Development of industrial, residential, and commercial property
- Negotiate, structure, and consummate financial transactions.
- Prepare and review leases for industrial, office, and shopping centers
- Formulate construction contracts for builders, contractors, engineers, architects, and landowners
- Draft and implement deed restrictions for residential developers, commercial developers, and homeowner associations
- Facilitate title searches
- Clear up title defects and foreclosures
Contact our real estate attorneys to make sure your interests are well represented.
What is the Difference Between Commercial Real Estate and Residential Real Estate in Texas?
Residential and commercial real estate are both real estate parcels of land that people or companies can purchase from a seller. However, in Texas, there are many different laws surrounding each type of real property, which all potential purchasers and sellers must be aware of. This article will dive into the main differences between commercial real estate and residential real estate.
Our knowledgeable real estate attorneys here at Jackson, Landrith & Kulesz, PC have years of experience with real estate law in Texas. Contact us today if you have any questions.
What Is Commercial Real Estate in Texas?
Commercial real estate is real property used for business purposes. Commercial properties include office space, retail space, multi-family units, hotels, warehouse space, storage, manufacturing plants, and land purchased for development. Transactions involving commercial real estate tend to be more complicated and take longer than residential real estate transactions. Commercial real estate transactions usually happen between businesses, and the main contacts are business owners and their CEOs or operations managers.
What Is Residential Real Estate in Texas?
In Texas, residential real estate refers to real property people buy or rent to live in. A residential real estate transaction involves individual consumers who want to buy or rent homes. The transaction is between the buyer and the seller of the house. Residential real estate transactions tend to be simpler and occur more quickly than commercial real estate transactions. Real estate developers often buy vacant land and develop parcels to sell for residential homes.
What Are the Different Laws in Texas that Apply to Commercial or Residential Real Estate?
Different local and state laws apply in Texas for commercial and residential real estate. Local laws regulate land use, including zoning and permitting regulations. Texas law includes homestead laws to prevent creditors from taking away a private residence to pay a debt for residential real estate. Texas also has separate laws for residential and commercial landlord-tenant relationships. The Texas Property Code and local city ordinances apply to both residential and commercial real estate.
Is Commercial or Residential Real Estate a Better Investment in Texas?
Many Texans want to know whether they should put their money towards commercial or residential investment opportunities when looking to invest in real estate. The answer is it depends. Generally, commercial real estate is a better investment because commercial properties are geared towards generating income. A good commercial real estate investment can yield between 6 and 12 percent yearly returns.
That said, the residential real estate market in Texas is booming. As most Texans know, residential real estate prices have soared in the past few years, with the hottest markets in Austin, Houston, Dallas, Fort Worth, and San Antonio. As of October 2021, the Texas median home price had risen for the tenth consecutive month, appreciating 1.4 percent each month, with an average cost of $317,700.
Difference Between Commercial Loans and Residential Loans in Texas
There are two types of residential loans—loans you take out to buy your personal residence and loans you take out to buy a home to use as an investment. The most simple loan is a loan to buy your personal residence. Lenders usually require a down payment of 10 to 20 percent for a loan on a primary home, and you can have up to 30 years to repay a residential loan for your personal residence. By contrast, taking out a residential loan for investment requires a higher down payment, and lenders will typically charge a higher interest rate as well.
With residential loans, the lender loans money based on the buyer’s personal finances—that is, based on your annual income and your credit score, which is a good calculator of whether you’ll be able to pay back the loan.
Texas law defines a commercial loan as “a loan that is made primarily for business, commercial, investment, agricultural, or similar purposes.” Taking out a commercial loan in Texas is more complicated than taking out a residential loan. It is also more expensive. Commercial loans are more complicated because the local, state, and federal laws regulate them. Lenders for commercial loans tend to charge higher interest rates than residential loans, and they also tend to have shorter loan terms (5-20 years rather than 30 for residential loans). Commercial loan lenders also typically require a higher down payment than residential loan lenders, ranging from 15 to 35 percent of the purchase price.
Investors or purchasers often use commercial loans to buy or renovate commercial property. To get a commercial loan, lenders sometimes require that the owner must occupy all or most of the property. Lenders will often heavily scrutinize a business’s finances to ensure that the company has enough cash flow to pay back the loan. Commercial lenders calculate a business’s debt service coverage ratio, which is the business’s annual net operating income divided by the business’s annual total debt service, which means the amount the company will pay in principal and interest on the loan. Lenders often require a ratio of at least 1.25.
As an example, if a business with no debt applies for a $100,000 commercial loan, the lender will want to confirm that the business generates a net operating income of at least $125,000.
Commercial Versus Residential Building Costs in Texas
The National Association of Home Builders estimates that the average cost to build a single-family home in Texas is just under $300,000, which amounts to about $114 per square foot. The price, of course, varies widely depending on where you’re building and the choice of materials.
In Texas, commercial building costs vary widely depending on the type of structure being built and the materials used. Therefore, it is difficult to give an average cost to build a commercial building. During the past year, certain construction material prices have risen steeply, including the price of softwood lumber, particleboard, and oriented strand board. Prices have also risen for plywood, asphalt, iron, and steel scrap. In addition, with supply chain issues, material delivery times have been significantly delayed, increasing construction building costs.
Licensing and Permit Requirements for Commercial Versus Residential Real Estate in Texas
For residential properties in Texas, a homeowner must obtain a building permit to build the residence. Usually, the general contractor will purchase and apply for this permit for the homeowner and then charge the homeowner for the permit cost as part of the construction costs. Obtaining a residential building permit is fairly simple. The permit application will usually ask for the property address, the property owner’s name and contact information, the contractor and/or engineer’s names and contact information, the type of construction being done, a description of the work being done, and the total costs of the construction.
Commercial properties also require permits to build. The city where the building is being constructed will issue the permit. Each city has its own requirements for commercial building permits, and these permits require more documentation than a residential building permit. This is because commercial properties must comply with various property laws, including zoning. Commercial building permit applications typically go through a plan review process to ensure the planned structure complies with all applicable laws. The process includes inspections. The permit process ends when the city issues a Certificate of Occupancy, which means the local government gives authority for the building to be used, and this applies to both commercial and residential building use.
In addition to permitting requirements for commercial construction, some cities also have business licensing requirements.
Different Documentation for Commercial Versus Residential Real Estate in Texas
Lenders for residential loans require written proof of income, so you’ll have to produce pay stubs, tax returns, and other financial documents during the loan process. The lender will also check your credit score. A higher credit score will likely result in getting a lower interest rate on the loan.
As noted, commercial lenders highly scrutinize a business’s finances to ensure that the company has enough cash flow to pay back the loan. This means the lender will require a lot of documentation about a business’s ability to repay the loan. Required documentation may include revenue projections, cash flow statements, tax returns, and bank statements. Commercial lenders will also check the business’s credit score to determine the business’s likelihood of paying back the loan.
Which is Easier to Finance?
Residential loans are much simpler to finance than commercial loans, especially for owner-occupied properties. Obtaining a residential loan may take just a few weeks, and many lenders often online applications that allow loan applicants to upload the required documentation. By contrast, obtaining financing for a commercial loan could take much longer.
Difference in Rent Structure for Each Type
Under Texas’ landlord-tenant laws for residential properties, the parties can agree to the rent structure, but typically rent is due in full the first of every month. Tenancies can be week-to-week, month-to-month, quarter-to-quarter, or year-to-year.
For commercial tenancies, the parties usually negotiate the rent structure. Commercial tenancies tend to be much more complicated than residential tenancies because commercial leases can take many forms, depending on the type of business operated. Commercial tenancies tend to have longer lease terms than residential leases, usually requiring a lease term of at least one year.
Difference in Tenant Responsibilities
Texas has separate laws for commercial and residential tenants, with different rights and obligations for each:
Landlord-tenant laws for residential leases
Texas’ landlord-tenant laws for residential properties generally require the parties to have a written lease agreement if the tenant will stay in the property for more than 12 months. Landlords must maintain a habitable unit for the tenant and respond to repair requests within seven days or three days if there is no drinking water, air-conditioning, or heat. If a landlord does not make a repair, as required under the lease or by law, certain laws will protect the tenant.
Residential tenants must:
- Keep the property in a safe and habitable condition,
- Use fixtures properly and keep them in a clean and sanitary condition,
- Make repairs, as required in the lease,
- Immediately notify the landlord of any defects or maintenance needs, and
- Refrain from disturbing other tenants or neighbors,
- Obey the law.
Residential landlords can collect rent from the tenant and evict a tenant for non-payment of rent, provided the landlord has given the tenant written notice. The lease and Texas Law determine how much notice is required.
Some Texas cities also have local landlord-tenant laws for residential leases, including Dallas, Austin, San Antonio, and Houston. Check your own city’s government website to see if there are additional landlord-tenant laws.
Landlord-tenant laws for commercial leases
Texas’s landlord-tenant laws for commercial leases are less extensive than those for residential leases. They also offer fewer protections to tenants. In contrast to residential leases, which are typically not negotiated, Texas law presumes that the parties negotiate commercial leases. Commercial leases tend to be much more complicated than residential leases, with many more terms. A commercial lease agreement’s standard provisions typically include sections addressing:
- The business’s permitted use
- The lease terms
- Renewal terms
- The rent amount
- The obligations of each party as to utilities, maintenance, insurance, taxes, and management of the common areas
- The security deposit owed
- Requirements for alterations or improvements
- A statement of the lessee’s requirement to comply with all local, state, and federal laws
- A statement as to whether the lease may be assigned
- The landlord’s rights in the event of the tenant’s non-payment of rent or non-compliance with the lease.
- Relocation of tenant to another space.
Commercial leases can include many additional terms depending on the type of business, and they can quickly become complicated. Unlike residential leases, commercial leases don’t offer much protection for tenants.
Texas law presumes that the tenant and landlord will negotiate the terms of a commercial lease, so the law doesn’t place as many obligations and responsibilities on commercial landlords as it does on residential landlords. Commercial leases, especially for small business owners, are often written very heavily in the landlord’s favor.
One type of commercial lease is called a triple net lease. With this lease, the tenant is responsible for paying for insurance, taxes, and property maintenance. This means the landlord is passing on all the risks of being a landlord to the tenant. Because commercial leases can be complicated and favor the landlord, people thinking about entering into a commercial lease should contact an attorney to review the lease’s terms.
With commercial leases in Texas, if a business fails to pay rent, the landlord can “lockout” the tenant from the business. This means the landlord can change the locks to the building so the tenant can’t enter. Texas law offers no grace period for the tenant to try to come up with the rent, so the landlord has the right to lock out a commercial tenant, even if the tenant is only one day late paying rent. The exception to this rule is if the written lease has a grace period for the tenant to pay rent. Most commercial leases provide a landlord’s lien on the tenant’s property to secure rent owed.
Difference in Valuation
Commercial properties in Texas are valued based on the income the property generates or is expected to generate. The income potential for commercial property varies depending on the cap rate. The cap rate is based on the yearly income the property generates.
By contrast, residential properties are valued based on similar comparable residences in the local area. This makes valuing residential properties much simpler than valuing commercial properties.
Where can I close my real estate transactions in Arlington, TX?
Title insurance is essential to protect against possible title defects, including:
- Errors and omissions
- Mistakes made in examining records
- Undisclosed heirs
- Missing heirs
- Unpaid tax liens
- Contractors liens
Jackson, Landrith & Kulesz, PC has more than 60 years combined experience providing real estate transaction closing, funding, and title policies through Reunion Title.
Questions about Commercial and Residential Real Estate in Texas?
If you have any questions, contact our real estate attorneys today for a consultation. We have extensive experience helping our clients throughout every step of both the residential purchase or sale of a property, and the commercial development, construction, purchase, or sale of a property.
Contact us today to learn how we can help you!