Without doing your due diligence before sending an offer and while a commercial building is under contract, you risk proceeding with a sale that does not deliver the return you anticipated.
Before closing on a commercial building, perform property inspections, environmental assessments, a lease audit, a financial analysis, and a title search. Confirm that the building is zoned properly for your planned use and check the property’s permit history to discover previous violations. We can ensure the final sale is contingent on the property passing all your due diligence checks, so you don’t make a bad investment or lose your earnest money.
Call the Heyman Law Firm today at (410) 305-9287 for a confidential and free case analysis from our Baltimore real estate transaction and disputes lawyers.
What Due Diligence Should You Perform Before Buying a Commercial Building?
When helping you navigate a commercial real estate transaction, our lawyers can make sure you do your due diligence and can confidently finalize the transaction.
Property Inspections
Before finalizing your purchase of a commercial building, have thorough property inspections conducted. Inspections can reveal concerning structural, foundational, and other problems throughout the building that you were previously unaware of and are costly to fix. Inspections should cover HVAC systems, electrical wiring and panels, and plumbing systems.
Based on the inspection results, you may request that the seller fix the issues before the sale is finalized, or you may request a credit to cover the repairs yourself. If the seller refuses, you may exit the transaction.
Inspections are done during the escrow period, allowing you to back out of the sale without losing your deposit if you find anything concerning. Waiving inspections is very risky, especially for large commercial buildings.
Environmental Assessments
You should also conduct environmental assessments before finalizing your purchase to identify any hazardous materials, such as lead, radon, mold, asbestos, or contaminated soil. For commercial properties, the first step is the Phase I Environmental Site Assessment. If red flags are identified in Phase I, further testing follows during the Phase II Environmental Site Assessment. Lenders typically require environmental assessments for commercial buildings, even if they are not required by law for a real estate transaction.
Lease Audit
If the commercial property you want to buy currently has tenants, conduct a lease audit to ensure you understand the terms of the leases you will assume. In the purchasing agreement, our real estate transaction and disputes lawyers can specify that the seller must provide rent rolls and lease agreements and that the sale is contingent on your review of that information.
Common issues found during lease audits include discrepancies between the rent roll and rent collected, and between security deposits and their amounts.
Financial Analysis
We may also request up to 3 years of operating expenses and tax statements for the commercial building to help you get a better idea of your likely return on investment after finalizing the purchase. If operating costs are too high, you may reconsider making the purchase or change your offer.
Confirm Service Contracts
When you purchase a commercial building, review any and all service contracts. The current owner could be overspending on any vendor, and automatically accepting those contracts with the sale could be financially unwise and hurt your return.
Title Search
Our attorneys can also perform a title search to uncover any hidden liens on a commercial property, confirm the chain of ownership, easements, and learn about encroachments or restrictive covenants that would affect you if you purchase the commercial property.
Zoning Verification
You also need to make sure the building is zoned properly for your intended use. If it is not, you can request that the seller seek a zoning change or variance before the sale finalizes, so that you don’t have to go through that process yourself and delay your business or tenants moving in. There is no guarantee that you will receive a zoning variance after the sale, so make the transaction contingent on the seller updating the zoning.
Permit Search
Check to confirm that all renovations and repairs over the years have been up to code and have been completed only after obtaining the proper construction permits. All of this information is part of the public record, so you do not have to be under contract and in escrow to perform a permit search on a property. A permit search will reveal all permits pulled for the property, as well as any permit violations through the years.
FAQs About Buying a Commercial Building
Do You Need a Lawyer When Buying a Commercial Building?
You need a lawyer during a commercial real estate transaction to ensure your interests as a buyer are protected, as well as your earnest money, in case you need to walk away from the sale.
What Contingencies Should You Include When Buying a Commercial Building?
When buying a commercial property, include contingencies for failed inspections, zoning issues, title issues, health hazards, and excessive operating costs. We may suggest additional contingencies based on the specific building’s age, location, or use.
What if You Change Your Mind About Buying a Commercial Building?
If you change your mind and decide not to buy a commercial building when you are already under contract, you must cite a contingency included in the contract that lets you leave the sale without losing your earnest money. If there is no contingency for you to cite, you lose your earnest money.
What Are Common Mistakes People Make When Buying Commercial Buildings?
Common mistakes in commercial real estate transactions include underestimating operating costs, rushing or waiving inspections, taking seller disclosures at face value, skipping environmental assessments, and failing to audit current leases the buyer will assume after the sale.
Get Our Help During a Commercial Real Estate Transaction
For the free case assessment you need, call the Heyman Law Firm’s real estate transaction and disputes lawyers at (410) 305-9287.