How a commercial real estate buyer should handle due diligence

Simon Caplan, SIOR, principal, CRESCO Real Estate

After signing a contract for your commercial building purchase, you begin due diligence, which is usually a 45- to 60-day period you and your broker use to inspect every possible issue, use or aspect of the property. There are a number of key areas to consider and you only have a limited time to do so.

“Next to negotiating the purchase price, the due diligence period is probably the most important part of the transaction from the buyer side,” says Simon Caplan, SIOR, principal at CRESCO Real Estate.

Smart Business spoke with Caplan about the critical points to check — or re-check — during the due diligence period.

Who do you check with about property use and government concerns? 

Every community has different zoning codes and definitions vary from city to city. It’s imperative to check with the mayor or local zoning official that your planned use of the property fits within the current zoning and to ascertain what you need to do to get all required occupancy permits to operate your business. This would include building permits if major renovations or an addition are part of either your short- or long-term plans. It’s also important to ensure your building will pass fire and building inspections. In addition, some cities require a point of sale inspection; for the most part, these are the inner ring suburbs bordering the city of Cleveland such as Bedford and Garfield Heights.

Usually the availability of a tax abatement, income tax credits or other economic incentives are mentioned in the purchase agreement. However, the due diligence period is most likely when the incentives are actually granted.

What are some best practices to follow with the title?

Review your property’s title commitment to find problem areas that could include liens, deed restrictions, easements, mineral rights, etc. Make sure you understand your rights. For example, property easements may benefit you or may hinder your use. Know who is responsible for repairs and how they relate to planned expansion. Some issues, which you may already be aware of, need to be discussed with the title company and/or seller and should be removed from the title insurance policy. Ninety-nine percent of the time you want to get an owner’s fee policy.

What should be surveyed?

The best survey is an American Land Title Association (ALTA) survey, which lets you know what you are buying. An ALTA survey shows property lines, exterior building lines, paving, curbing, catch basins, parking, fencing, utilities, landscaping, etc., as well as easements or encroachments. The title commitment only gives easements in hard-to-understand legal terms. On an ALTA you can actually see how they affect property. Other areas to study are parking, expandability and storm drainage.

How should building owners assess environmental factors?

When buying commercial property, even if everything appears clean, you should have an environmental Phase I study done. Phase I is a historical assessment and a physical walkthrough of the property by a certified environmental consultant.

If Phase I recommends further inspection, you move on to Phase II, which involves taking samples of soil, ground water, concrete, potential asbestos-containing materials or other suspicious environmental conditions. Phase III is the actual cleanup, which can be costly. Environmental factors are one of the biggest deal killers and lengtheners.

What’s critical regarding the building?

The building inspection is essential, parts of which can may be taken into account earlier. The major issues are the condition and life expectancy of the roof system; the structural components of the building, especially walls and floor; and that the mechanicals — fire suppression sprinkler, HVAC, plumbing, electrical — are working and to code. These relate to the building’s integrity and can be expensive to fix.

What if there are many problems?

If problems or obstacles are discovered that have serious economic impact or use impact on the property, you should walk away from the deal or get the seller to renegotiate the purchase price.

Simon Caplan, SIOR, is a principal at CRESCO Real Estate. Reach him at (216) 525-1472 or [email protected]

Insights Real Estate is brought to you by CRESCO


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