Commercial property owners and investors are well aware that thorough investigation and due diligence are critical steps to take after a contract has been signed, but prior to closing, on the acquisition of commercial real estate and taking title to the property. However, fewer individuals are aware that due diligence and investigation of property should begin before a contract to purchase is signed. Due diligence and investigation and the awareness of material facts concerning the property can be crucial in negotiations prior to signing a contract.
The extent and scope of any due diligence differs with each property and depends on the goals of the buyer. For example, due diligence will depend on various factors such as (a) is a business being acquired in conjunction with the real property, (b) is the buyer going to occupy the property or rent it to a third party and expect a return on investment as a result of rental income, and (c) is the buyer going to hold the property long term or only on a short term. This list can go on and on. But no matter the reason and goals for acquiring property, a buyer must perform due diligence is to ensure awareness of all material facts concerning the property, and a buyer’s investigations should begin before a contract to purchase is signed.
The following are among the questions that should be investigated and answered prior to signing a contract to purchase commercial property in order to save time and money that would otherwise be spent in negotiating a contract property that the buyer may ultimately determine is not suitable. In addition, this information can be useful in negotiating the terms of a purchase contract.
- What is the real property being purchased? For example, what is the legal description of the property, the street address and parcel or property identification number.
- What is the size of the building or other improvements?
- What, if any, fixtures or personal property are included or will be removed from the property prior to closing?
- Are there any development rights or obligations pertaining to the property?
- What is the physical condition of the property? At the very least, a visual inspection of the property should be done and, if necessary, an inspector should perform a site visit to identify any obvious concerns with the property such as encroachments, access, or physical damage to the property.
- Is the property in compliance with zoning and land use classifications and/or consistent with development plans for the property?
- Are improvements, changes or major renovations required to make the property suitable for the buyer’s intended use? And, if so, what are the estimated costs of these items?
- Does the property comply with Americans with Disabilities Act or is it exempt?
- Does the property contain sufficient parking?
- Are there any open or expired permits on the property?
- Are property taxes on the property paid?
- Are there any title concerns based upon an initial review of the official records website in the county where the property is located? For example, are there any recorded liens on the property, is there an outstanding mortgage on the property and, if so, is the outstanding amount less than the purchase price, and is there any pending litigation regarding the property.
These are just examples of questions that can be answered relatively quickly prior to the start of contract negotiations. Obtaining answers to these questions will not only assist a buyer in negotiating a contract with the seller, but will also allow a buyer to identify areas of concern that need to be further investigated or resolved, and can ultimately save a buyer time and money.