There’s a lot of discovery that takes place before buying a commercial property. Smart buyers and their brokers do their homework to understand as much as they can about their options before setting foot on a property.
Walkthroughs offer a chance to inspect for any issues that could affect their occupancy and operating requirements. But once a purchase agreement is signed and they enter the due diligence period, it’s their last chance to ensure they’re getting the right deal and not making a costly oversight.
“This is a buyer’s last chance to walk away,” says Simon Caplan, SIOR, a principal at Cushman & Wakefield/CRESCO Real Estate. “It’s a final opportunity to get up close, bring in experts and make absolutely certain the property best meets their needs.”
Smart Business spoke with Caplan about the due diligence period and how buyers can use it to protect their interests.
What should buyers understand before visiting a property?
Before going on location to inspect a building, talk with the real estate agent. He or she should have the fundamental property information, including a list of recent capital improvements.
Make sure it’s zoned for the type of use planned. If materials need to be stored outside, determine if that’s permitted. Many communities won’t allow that and it can be costly if other plans need to be made for a solution.
Check the access to roads and highways. If the company will rely on trucks to bring in or ship out goods, it’s important to understand if any restrictions exist, the direction trucks can travel on the roads that feed into and out of the property, and the proximity of highway entrances and exits.
Once at the property, what should buyers be sure to inspect?
During the initial visits, buyers should bring their internal experts to inspect the property to ensure it’s fit for their intent. Manufacturers, for example, will want their plant manager or engineer along to make sure the building has enough space and the right layout to accommodate the company’s requirements. They should also check that the building is equipped with enough electrical power to operate the equipment.
Prior to making an offer, they should approach a prospective property armed with a good idea of its condition, recent capital improvements and a sense of how much they’re willing to invest to fix existing issues and to set up for their own use.
Once the purchase agreement has been signed and the due diligence period officially begins, bring in professionals to take a closer look at any issues that were caught initially. For instance, bring in a roofing contractor to look at the condition of the roof, a building contractor to inspect any structural issues, and an HVAC contractor to check out the equipment.
An issue that’s recently become a sticking point is a building’s fire suppression sprinkler system. An update to the fire code a couple years back has meant that many buildings are no longer up to code. Bring in an expert, or a municipal representative, to look it over before moving forward with the purchase because the systems are expensive to replace.
How does a municipality’s zoning factor in to due diligence?
A municipality’s building and zoning codes play a big role in how a property is utilized. Invite municipal inspectors to walk through the building, regardless of whether it’s required, to check for code violations. It could save a lot of hassle later.
Additionally, look at zoning with an eye to the future. Explore whether any potential expansion of the physical building is allowed and to what extent.
At what point does an issue become a deal breaker?
If the costs of repairs or upgrades are significantly above the buyer’s reasonable expectations, provide the seller with a list of any major, unexpected issues found during inspection along with copies of quotes from contractors. It’s rare, but there is a chance the seller will either fix the problems or adjust the sale price to compensate.
The due diligence period is not a time to renegotiate the deal terms, but it is a critical time for buyers to uncover costly surprises. A little homework goes a long way toward getting the best deal. If a resolution can’t be made, the buyer has the choice to walk away. ●
Insights Real Estate is brought to you by Cushman & Wakefield/CRESCO Real Estate