Top 10 Questions to Ask Before You Buy Commercial Real Estate
If you are looking at acquiring a piece of commercial real estate, you need to make sure that you’re making a wise investment. Depending on the type of property you plan to buy, the location, the age of the property, and what your intended use is, there is a great deal of specific and important information you should know. Below are the top 10 questions I feel as a commercial real estate attorney in Denver you should have answered before you even consider putting in a bid or a down payment on any commercial real estate.
1. Is title clear? An Ownership and Encumbrance report can be quickly and easily obtained prior to writing an offer to purchase a property. During the due diligence period, the buyer will be furnished with a full title report disclosing all encumbrances against the property. Be sure you have clear title and will be granted a “General Warranty Deed” for the best protection. This is one of the best ways to guard yourself from any ownership challenges.
2. Does the survey match the described property lines? It happens more often than most would think, but a seller is not always aware of the exact property lines. They best way to ensure that the seller hasn’t built into a neighbor’s property lines or vice versa is for the seller to provide a recent property survey.
3. Is there insurable access to the property? Many people believe that if there is a road to the property, access is not a concern. This is not always the case. In Colorado, there are many businesses that are located in rural areas with limited road access, so actual access to the property is much different than insurable access to the property. If there is not insurable access, you may encounter problems in the future if you attempt to develop, finance or sell the property.
4. Does the zoning code allow for your proposed use? You should verify with the city or county that the zoning code permits your intended use of the property. You don’t want to spend time and money building a business only to be shut down by zoning. Re-zoning a property is something that can be done in some, but not all cases.
5. Are there any environmental concerns? A “Phase I environmental assessment” should be obtained. Depending on the results of that report, a “Phase II environmental assessment may also be required.” Do not assume that because the property has never been used as a gas station, dry cleaning business or other type of business that there aren’t any environmental concerns with the property.
6. Are there code enforcement liens, expired permits, unsatisfied development or easement obligations, or unpaid municipal liens that may create potential legal liability for you, as the new owner? This should be answered when clarifying title ownership, but it’s worth double checking. Some code enforcement liens may attach to all property owned by a person selling the property and this is not only limited to the property that is in violation of the code. This is referred to as “cross attaching.” If the seller owns property with a cross attaching super priority code enforcement lien against one parcel and you purchase another parcel from the seller, the property may be subject to the lien. This is where having a General Warranty Deed will protect you against all liens or encumbrances against the property.
7. Are there any major issues with the building? Before purchasing any property, obtain an inspection report to detail of any repairs to the structure such as the roof, electrical, plumbing, fire sprinklers, elevator, or HVAC are required. Due diligence documents should also be requested pertaining to the above mentioned systems and improvements. This will give you a glimpse at what the owner has taken care of, or neglected.
8. Are there tenants? If so, carefully review each lease agreement to determine the landlord and tenant obligations, whether or not if the tenant has a right to purchase or relocate, or if the tenant has exclusivity. You should also determine if the tenant has paid a deposit or advance rents and obtain a tenant estoppel letter.
9. If there are tenants, is there a rent roll? In commercial property sales it is important a log of tenants as well as their deposits and charged expenses is passed along with other operating data in order to ensure accuracy of accounting moving forward.
10. Is there a detailed record of operating expenses and other financial records pertaining to the property? Once again, having these financial documents dating back prior to your ownership of the property will ensure accuracy in accounting and when making income projections. These financial records have an impact on the value of the property, so the seller should have them readily available upon request.
You could be a seasoned real estate investor, but I have seen people over look at least one, if not more of the key questions above when they’re purchasing a property. This can be a costly mistake when dealing with the ramifications, such as having to move a business due to zoning or learning about expensive repairs after the purchase has gone through. I strongly recommend you retain an experienced real estate broker and real estate attorney to assist you through this process. If you would like to schedule an appointment at my office, you can give me a call at (303) 741-2354 or you can contact us online at nesbittlawoffices.com.
Eric L. Nesbitt, Esq.
Law Offices of Eric L. Nesbitt, PC
Nesbitt Law Offices Website