By: Will Van Vactor
Before purchasing commercial real estate, it's critical to thoroughly review all aspects of the property. By taking your due diligence seriously, you can identify red flags, such as title issues, tenant problems, and zoning concerns. You might resolve some of these issues through additional negotiations with the seller, or by identifying the issues before closing, you may realize it's not the right property for you.
Here is a list of some due diligence considerations to review before buying commercial real estate:
1. Title: Get an up to date title report and review it for things like title defects, pending litigation, and CC&Rs.
2. ALTA Survey: An ALTA survey will, amongst other things, confirm the property description, identify the location easements, and confirm legal access.
3. Property Inspection: Just like when buying a home, inspecting the property is recommended. You do not want to find out that the plumbing or electrical components are nonfunctioning after you purchase the property.
4. Environmental Assessments: Under environmental laws, property owners can be liable for contamination, even if a prior owner caused it. Since environmental clean-up can cost hundreds of thousands, an environmental assessment can help identify this risk.
5. Land Use and Zoning: Land use regulations determine what uses are allowed and where. It is important to make sure your intended use (or any existing use you intend to continue) is lawful.
6. Tenant Review: It is important to review existing leases to know what you are getting into.
7. Financial: A detailed accounting of rent and other income, common area maintenance charges, security deposits, etc. will provide financial context so you can make sure the figures add up.
8. Litigation: Obtaining a copy of all insurance policies, pending claims against the property, and pending litigation is also recommended. You should also make sure the seller confirms there are no threatened claims that might affect the property.
One other important consideration is time. Be sure to negotiate with the seller for a due diligence period that is long enough for you to review everything.
The above is not intended as a complete list. Every property is different. Moreover, each of the above items has multiple components that warrant careful consideration. Hiring an experienced team, including a commercial broker and real estate attorney, is important to make sure your big investment turns out the way you intend.
The information on this blog is for general informational purposes only. This information is not intended to create, and receipt or viewing does not constitute an attorney-client relationship. Nothing on this site should be taken as legal advice for any individual case or situation. This blog should not be used as a substitute for competent legal advice from an attorney licensed to practice law in your state.