Full disclosure is an integral piece of any real estate transaction. While residential real estate transactions are highly regulated, commercial real estate plays by different rules. Let’s talk about the significant differences between the two.
In residential real estate, the seller is required to fill out pages and pages of documentation regarding the property and its condition. Some examples include well & septic disclosures, lead paint, roof leaks, wet basement, etc. The seller provides these disclosures to all potential buyers, and the buyers rely on these disclosures to determine if they will move forward with a purchase offer.
Commercial real estate building purchases are business-to-business transactions, so there are typically no consumer protections. Some foreign countries have standardized contracts that afford protections to both parties, but in most of the United States, contracts and terms are up to the seller and the buyer.
A purchaser of commercial property is rarely given written property disclosures. If they are, it will be the seller’s actual knowledge, with limited protections for the buyer. However, the buyer is given a period of time to conduct their own property investigation/due diligence to look for any unforeseen problems. First-time buyers might not be aware of this, so it’s important to have experts on your team for any sale transaction.
The major due diligence components of a commercial property purchase should include:
- Title and survey review to ensure clear title/no boundary disputes or other recorded interests
- Environmental review to determine if past users have contaminated the site
- Physical building inspection covering the structure, interior improvements, HVAC and electrical systems, fire protection systems, the roof, and the parking lot area
- Review of existing building maintenance contracts (if they will be inherited)
- Review of any existing leases (if there are any tenants in the building)
- Zoning review to ensure your use of the property is permitted and not limited in the future
- Flood plains/insurance issues
- Pending litigation against the seller pertaining to the property
- Delinquent taxes or property liens
The above isn’t necessarily an all-inclusive list―there might be other things you need to review, depending on the specific property being purchased.
You should be prepared to spend time and money completing the due diligence. While you might be able to review zoning and unpaid taxes on your own, you will need to outsource the environmental review, title review, survey, and property inspection. Unfortunately, if you find many things wrong with the property and decide not to buy it, the costs of your inspections are not recoverable. While many properties don’t have significant issues, some do and that is why due diligence is extremely important.
It is advisable to have an exclusive buyer’s agent represent your interests when acquiring property. ITRA Global advisors understand the local market conditions and have experience with property purchases, including the due diligence process, and can advise you how purchase contracts might be renegotiated to address property issues and costs that are discovered during your due diligence. Find your local ITRA Global advisor here.
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Article submitted by Wayne Teig / ITRA Global Minneapolis-St. Paul USA
