Before you make a commitment to purchase real estate, you need to ask yourself, your broker and the owner some crucial questions to make sure you’re finding the best property for your business.
Beyond the physical condition of the building, there are multitudes of intangibles that have to be taken into account when evaluating a commercial property for acquisition; things as simple as the current number of parking spots can impact the true property value.
Likewise, while a building today will meet your needs, will it still meet your needs five years from now?
Review documents and contracts
Review all documents concerning the building and its operation. This includes leases with any and all extensions and modifications, notes and mortgages, whether you are assuming them or not, title policy, certificate of occupancy, insurance policies, ADA compliance, elevator maintenance contracts, tax tickets and history, licenses (in some jurisdictions) and parking lot contracts.
Using the list generated in the purchase agreement, go over each item and assign the task for it to a member of the acquisition team, whether it’s the lawyer, surveyor, building inspector, environmental firm or someone else. Make sure they are each contacted, given the timetable for the deal and then called upon to complete the task.
Be complete
While it may seem simple, it only takes one missing document to stall a closing. Each day a closing is stalled, the chances increase for some other element of the agreement to come unraveled. If you’re not going to do access and review documents yourself, then be sure whomever you assign the task to follows through.
The insurance policy can be a good source of information, especially when you are considering an older building. Insurance inspectors can provide a copy of an existing risk assessment.
Ask the owner to request a copy from his or her insurance company for your review.
Dig deeper
Also get a claims history for the property. If an owner has switched insurance companies frequently, you will want to know the history of the claims. It is common for building owners to shop their insurance policies for competitive rates.
But at the very least, require an affidavit from the owner that says he attests to the truth of the claims represented as being complete to the extent of his knowledge.
Ask open-ended questions and seek out any resources available to you. The end result of a thorough due diligence process is that when the time comes to present your findings to other stakeholders, you will have the level of information and knowledge about the real estate opportunity that will lead to a sound, well-researched and documented decision. Dan Flynn is a commercial lender with The Grange Bank. He is located at the firm’s South Front Street main location in Columbus. Reach him at (614) 449-5338 or via e-mail at [email protected].
