There is a ton to consider when buying commercial real estate which is why it’s crucial to perform due diligence before making a purchase. This helps to minimize your risk and ensure the property is a good investment.
Avoiding Unpleasant Surprises
Beyond the physical condition of the building done through a building condition assessment, many intangibles have to be assessed. The building’s history must be researched, with all liens and obligations examined. Insurance policies on older buildings may contain a list of claims that have been filed, highlighting defects and potential liabilities.
As the building owner, you and your tenants are vulnerable to sudden economic downturns. A fully occupied building with a major tenant can become an under-occupied building if any tenant goes under. So the security of any income stream that depends on tenants must be carefully evaluated too. Payment histories and tenant credit files should be examined to determine how much risk is involved. Take a look at the lease agreements with each tenant to confirm the terms of the agreement and any renewals. Other things to consider are the type of business that each tenant runs. A restaurant or pub, for example, may have rules around liquor licencing that the landlord is responsible for and that comes with certain financial liabilities.
Take Your Time
Give yourself a period of 30 – 60 days after reaching an agreement with the seller before finalizing a deal. This will give you time to perform your due diligence and review all documents, including leases with current tenants, maintenance contracts, insurance policies and title documents, all of which should be provided by the seller. If you find any liabilities within the documents, you can use it as an opportunity to renegotiate the price.
As you examine the documents, build a list of questions and issues to be checked. Some examples:
- Does the zoning of the property allow for future development?
- Does the survey match the described property lines?
- Is there a satisfactory maintenance contract on the boiler? What is the guarantee on the roof?
- Are there code enforcement liens, expired permits, unsatisfied development or easement obligations, or unpaid municipal liens that may create potential legal liability?
- Is the title clear?
You can rely on third-parties to assist here such as a surveyor, building inspector, lawyer, environmental specialist, accountant or real estate agent.
Get pre-approved for a mortgage or loan so that you know what your budget is before starting your property search. Clearly understand what your lender’s conditions are prior to closing on a deal. Be realistic about what you can afford and be sure to have a contingency budget for unforeseen costs.
We know, all of this may seem daunting which is why we believe in hands-off ownership. We remove the unexpected headaches that come with buying property. From contracts to closing, from being a landlord to juggling maintenance—we handle all the details, so owners can just pick an address and go.
One thought on “How To Buy Commercial Real Estate”
I’ve been planning to buy a commercial building which will be rented out start-up companies. I agree with you that the building’s history must be thoroughly checked before investing in it. I’m glad you shared this too by the way; I’ll keep in mind to give myself at least 30-60 days before I consider buying the prospective company.