Regarding purchasing a commercial property — whether it’s your first purchase or your tenth — be sure to follow these eleven best practices. It’ll save you time, and most of all, money.
- Purchase Agreement.This is the single most important document that you can have in your commercial real estate transaction. With very few exceptions, a well-written purchase agreement will set forth the terms and conditions and timing of your purchase transaction.
- Disclosures. Unlike residential real estate transactions, commercial real estate disclosures are less frequently used, but they are necessary. For instance, vacant land in a commercial transaction will require the seller to complete a vacant land disclosure. More importantly, commercial real estate transactions can include business assets. Certain disclosures, rent rolls, financial disclosures, etc. will be necessary.
- Title Work. A title abstract is always necessary for a buyer to ensure that the seller has a marketable title. Initially, the attorney will order a preliminary title report to review the property’s ownership history to confirm the buyer’s intended use of the property. The attorney will also check for things that can directly affect the property, such as, easements, restrictive covenants, and zoning requirements.
- Zoning. Local governments classify parcels of land. These are called zones. Local zoning regulations designate businesses from farming or residential areas, protect natural resources and wildlife; specify lot sizes, or regulate the types of animals owned by landowners. For instance, a commercial property can be deemed worthless to a buyer who thought it could be used as a retail space, but the zoning regulations state that the property can only be used for office space purposes. If a property is not zoned for the buyer’s intended use, the buyer could be forced by the municipality to shut down or obtain a variance of use.
- Environmental Survey. It is highly recommended that a purchaser obtain a professional assessment about the current and historical uses of a property to assess any environmental hazards. Buyers face HUGE financial exposure and liability for environmental contaminants on a property. Owners of contaminated properties are required by law to clean up the environmental hazards found on property, which can cost millions, and often bankrupt property owners. Having an inspection performed by an environmental surveyor is paramount in a commercial real estate transaction.
- Location Survey. A physical survey of the property will find any issues relating to boundary lines, easements, and setbacks. An ALTA survey is the standard survey for most real estate transactions. Combined with a title policy, the title insurance company will then insure against problems not discovered in the ALTA survey. Closing without a survey means that you will have an exception to your title insurance coverage.
- Utilities. Buyers need to confirm what utilities service the subject property. This will include gas, electricity, water, and communications services.
- Appraisal. The buyer will need to have the property assessed to determine the value of the property. If a lending institution is involved to finance the property, then an appraisal is required.
- Hazard Insurance. It is important to obtain insurance for the commercial property. Be sure to determine ahead of time the cost to insure the building. Ask the seller to provide a current insurance declaration sheet for the subject property.
- Personal Property. Very often, in a commercial property transaction, the sale of a business will also be involved. In this case, the buyer needs to have a UCC search on the business assets (equipment, furniture, trade tools, etc.) to determine if these business assets are encumbered or liened by a creditor or bank. Additionally, the attorneys should draft a Bill of Sale for the personal property so that the assets value is not included in the value of the real property being purchased. Otherwise, if the value of the personal property is included in the value of the real property, the personal property value will needlessly be included in the property tax assessment.
- Assignments. Often the seller of a commercial property will have leases or other underlying relationships between themselves and third parties (tenants or vendors). It is important to have assignments of leases or contracts executed at the time the transaction closes so that the buyer has full rights to monies or legal obligations previously belonging to the seller.
Do you still need some assistance to make sure your commercial property transaction is a success? If so, feel free to give us a call at (888) 789-1715. We would be happy to answer any questions about this checklist, or help you with your commercial real estate needs.