Buyers today should consider engaging a Commercial Real Estate Professional to assist them with Buying a Commercial Property and incorporate Due Diligence as part of the process to purchase a Commercial Property.
A Real Estate/Title Attorney should also be engaged to review
the Title, Zoning, Land Use Regulations and in some cases, the Purchase and
Sale Agreement before it is fully executed by the Buyer(s) and Seller(s).
Site Inspectors/Engineers are also recommended depending on
the size and scope of the property. If
the subject property has always been an office building, the scope and level of
investigation may be limited. However,
if the property was ever a Gas Station or a Dry Cleaner, then expect to go
further into the history of the property.
Department of Environmental Protection (DEP) records can be researched
to determine if any spills or contamination may have occurred at the site or
adjacent to it.
Building Inspectors/Engineers can offer insight on the
condition of the structure, the systems, estimate remaining useful life of
those components and point out potential problems such as Mold.
And, in the case of new commercial development, a Civil Engineer will certainly offer insight as to a property’s development potential along with expectations for costs, timelines for approvals and construction and expectations from governing agencies such as Town, State and in some cases Federal Approval.
A typical Commercial Purchase and Sale Agreement spells out
Inspections, Permits and Due Diligence.
In many cases, the Seller is asked to provide any title history,
surveys, engineering studies, architectural, geotechnical, storm water,
utility, sewage, etc., as a request with the Seller’s documents being provided
for informational purposes
The Subject Premises are being conveyed “as is” or possibly
“as complete” depending on the specifics of the building or project. The Seller generally grants the Buyer and/or
his/her Agents to enter the property for reasonable investigations as part of
the Due Diligence work.
The Contract should “Spell Out” to Buyer’s Satisfaction and in
his/her sole discretion with its investigations, reviews, reports and findings
and those specific items such as Environmental Testing specifically spelled out
in the contract. If the Buyer is
unsatisfied with his/her investigation, the Contract may become null and void,
can be renegotiated or the Buyer and Seller may agree to extend the contract to
allow more time for Due Diligence.
As Ronald Reagan used to say, “Trust but Verify.” Property Disclosures are a guide to a
Commercial Property; however, Buyers should verify the facts as what someone
thinks is the case may have changed due to occupancy by Tenants or Zoning
changes by a Town or the State such as setbacks from roads, wetlands, and
lakes.
It is a good idea to get a title history done early on so that
any title issues may be addressed during the normal course of the
contract. A lot of times, title is done
just before closing, problems with obtaining title insurance pop up and the
deal must be extended to clean-up clouds on the title so an acceptable title
policy may be issued.
Some Commercial Property Sales include the assignment of
leases as the property may be a multi-tenanted shopping center. As part of the Lease Due Diligence, a Buyer
may want to see any extensions in the leases and a payment history as well as
any pre-existing Landlord consent given to a Tenant.
An Environmental Site Evaluation may become a requirement for
a Buyer to obtain commercial bank financing.
And this Due Diligence can help avoid inheriting potential liability
such as Environmental Contamination.
A Phase I Environmental Report can help determine the presence
or likely presence of any hazardous substances or petroleum products in or at
the property. This can be due to a release
in the environment or under conditions that could pose a threat of future
release to the environment. The Phase I
Environmental Report generally includes a site visit, local, state and federal
environmental records, historical research, interviews and visual observations.
In the event further investigation is warranted, a Phase II
Environmental Report may be required. In
this case, testing is performed on site such as borings to look at soils
samples and to determine an area of possible contamination.
If clean-up is required, this is what I would refer to as
Phase III. Soils may need to be
removed from the site to mitigate a problem.
The remaining contaminated soils might need to remain as they are under
a building or a road. The DEP has a program
- Voluntary Response Action Program (VRAP) that helps reduce the liability for
a Buyer and his/her Lender. The VRAP
allows applicants to voluntarily investigate and cleanup properties to the
Department's satisfaction, in exchange for protections from Department
enforcement actions. The VRAP is intended to encourage the cleanup and
redevelopment of contaminated properties within the state.
A property Condition Evaluation by a Building
Inspector/Engineer can give Buyers valuable insight as to the physical assets
associated with a particular property.
Site improvements, building components and operating systems such as
HVAC can be observed, tested, and evaluated.
Building deferred maintenance, anticipated capital repairs and
replacements can be prepared. Some
lenders require Property Condition Evaluations as part of their mortgage
lending commitments.
Like your teachers in school used to say, “Do your
homework.” When buying commercial real
estate and/or commercial land, I would urge all Buyers to do their homework and
engage professionals for the Commercial Real Estate Buying process like a Real
Estate/Title Attorney, Environmental Site Inspector/Engineer and Building
Inspector/Engineer. <
This article was brought to you by
Larry Eliason, Commercial Broker with Butts Commercial Brokers in Raymond. You
can reach him at 207-415-2112.
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