Just as you would when buying a house, it’s important to conduct a thorough review when considering a commercial property purchase.
“Next time I buy a house, I’ll be walking around with the inspector to make sure that they’re doing a thorough job. I’m going to be turning on the faucets and flushing the toilets just in case the home inspector misses it,” says Todd J. Wenzel, a partner at Ropers Majeski Kohn & Bentley PC. “It’s a little different with commercial properties in that the concerns aren’t the same, particularly if it’s an investment property. But you have to do your due diligence.”
Smart Business spoke with Wenzel about problems commercial property owners need to watch for, whether they occupy the space or serve as landlords.
What due diligence should be conducted before completing a purchase?
It depends on the age and size of the building, but for the most part it’s not as involved as with residential properties. With owner-occupied properties, it’s more about checking for any structural problems with the building. However, if it’s an investment property, look at occupancy certificates and rent rolls. Ensure leases are up to date with no outstanding renewals or rental payments.
With commercial properties, it’s important to have full disclosure. It’s expected that parties on both ends are sophisticated, so the law does not provide the same protections that residential purchasers receive.
Should you check on tenants as well?
There should be a file on each tenant, complete with financial background checks to confirm that tenants have the wherewithal to continue making payments. Be sure to look at whether a tenant has a history of late payments or nonpayment of rent.
In a recent situation, there was no credit report run on tenants. The client that purchased the property received a good purchase price, but the tenant files were very thin. It turned out that some tenants were in immediate default after the purchase. Ultimately, one tenant breached his or her lease, left and litigation ensued. Obviously, a buyer wants to avoid that; if you see tenant information missing, run your own credit check as part of your due diligence.
Considering the moist climate in Northern California, how big of a problem is mold?
It can be a real problem. You typically see mold claims in residential settings, but it can happen in commercial ones, too. Tenants must notify a landlord as soon as they suspect mold, because it becomes problematic once spores are airborne. Commercial leases should contain specific notice provisions required of the tenant to notify the owner of the first signs of mold.
A commercial tenant client recently suffered property loss and business interruption when a roof leak caused water to drip into the office space and storage room walls for months (possibly longer). When they opened the wall, they found mushrooms growing. Mold in a commercial setting is not as serious of a health risk as in a residence because no one is sleeping there, but you still can have people working around it eight hours or more a day.
If the problem is hidden in the walls, landlords have some defenses if they had no notice or reason to know. But if it’s indicative of a persistent water leak, the owner may be charged with constructive knowledge. The legal exposure is worse if the landlord knows and acts slowly to address the situation.
What key items need to be looked at when considering facility expansion?
The main concern is structural integrity and the foundation, making sure the soil will support an addition. Get engineers to check piers and other foundational measures.
If you’re doing an extensive renovation on an older building, you may need to bring it up to current codes. This cost estimate should be part of a preconstruction checklist.
Ask architects and engineers if they can incorporate green-building elements into the project. It may cost a little more, but it’ll speed up the permit process and can help in terms of public relations.
Although it’s difficult to get contractors to guarantee a maximum price because costs are based on time and materials, it’s a good idea to include a cap when bidding projects — a $50,000 job cannot exceed $15,000 in change orders. Otherwise, some contractors submit low bids, hoping to make up the difference in change orders. ●
Todd J. Wenzel is a partner at Ropers Majeski Kohn & Bentley PC. Reach him at (415) 972-6316 or [email protected].
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