Feintuch Law Insights & Observations

How To Lower Your Risk When Buying A Commercial Property

How To Lower Your Risk When Buying A Commercial Property

Investing in commercial real estate can be a profitable long-term strategy for entrepreneurs, a way to build both wealth and equity. While commercial properties typically have bigger earning potential than residential ones, there is also more risk.  That said, the importance of using an experienced commercial real estate lawyer can’t be overstated – a lawyer will thoughtfully guide a purchaser through the entire transaction, including everything from a complete due diligence investigation of the prospective property to completing the purchase of the property.

Without the proper planning, a commercial real estate purchase can fail due to many unexpected issues, including inadequate financing, zoning challenges, unexpected costs, and environmental lawsuits post-purchase. A complicated undertaking, a commercial real estate lawyer will guide the buyer through key considerations when buying a property, advise on ways to mitigate risks, and assist with a full and complete due diligence on a prospective property. Due diligence is an intensive, complex process, but a crucial one. The information gathered, everything from title and zoning to physical inspection and environmental study, will combine to determine if the property is suitable for the purchaser. A comprehensive due diligence investigation will carefully review important documentation and searches and assist to discover red flags that may affect the property. The Due Diligence will  include:

Title & Survey of the Property

A lawyer will review the most recent title of the property for title defects and, if available, will review an up-to-date certificate of survey. Title and survey are integral parts of a commercial real estate transaction, revealing basic information about the property: mortgages, registered agreements, easements and encumbrances, the exact size and location, physical improvements, access to public roadways, availability of utilities, parking, and any encroachments, easements, and boundary issues. Title and survey will impact a property’s use and value, and will also help avoid unpleasant surprises when looking to develop your property.

Zoning of the Property

Commercial and industrial zoning restrictions can be rigorous and a purchaser needs to know if a property is properly zoned for their business needs. Knowing what is and what isn’t permitted involves more than just simply looking at what the property was used for previously. Zoning bylaws change over time and a lawyer will ensure zoning requirements will be met for the purchaser’s intended use of the property.

Building & Environmental Assessment

In addition to structural, engineering, building, and mechanical inspections of the property, an environmental assessment should be conducted to safeguard a buyer against environmental liabilities. Carried out by environmental consultants, the environmental survey, a Phase I Site Assessment, will detail areas of concern (such as asbestos, lead-based paints, hazardous chemicals, and groundwater or soil contamination) and compliance with (or lack of) environmental legislation. This assessment is crucial because once the transaction is complete, the purchaser assumes all environmental risk and liability, and is responsible to clean contaminated land, regardless of whether they caused the contamination.

Leases

If the property has existing tenants, the purchaser will need a complete copy of each written lease with current tenants and a tenant acknowledgment from the tenants confirming they have no claims against the landlord. A lawyer can review the leases and assess what obligations the buyer will be taking on, the income and expenses that will be generated from these leases and, if the purchaser intends to develop the property, how the current leases may affect their development plans.  

Uncover Hidden Costs & Overruns

The purchase cost isn’t the only cost a buyer needs to consider. There are a number of significant costs that need to be budgeted for, including due diligence (environmental and structural assessments, appraisal, off title searches), closing costs (land transfer tax), construction, repair and renovation costs (roof, windows, foundation, siding, plumbing, electricity, heating, ventilation, and air conditioning), moving costs (furniture and equipment, signage), permits, operating costs (financing, utilities, property taxes, insurance and maintenance) and the cost of downtime during the move. While risks are inherent in most worthwhile business ventures, when purchasing commercial real estate, proper planning and guidance from an experienced commercial real estate lawyer is essential. Your lawyer will help you proceed with the confidence that you are well-protected against costly and unexpected pitfalls.

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