6 Legal Tips For Purchasing Commercial Real Estate
1. Identify the sector of commercial real estate.
First, it is important to discuss the sector within which you are purchasing: industrial, multifamily, retail, office or mixed use. Once you identify which sector, legal counsel can then advise you on the type of due diligence that you as the client need to perform.
2. Assess requirements that surround the sector of the property.
For instance, if you are purchasing industrial property, it is important to understand the requirements that are involved in alleviating environmental liability. Certain states have tougher laws regarding this, and New Jersey is one of them. In many states, completing a Phase 1 Environmental Assessment is sufficient. In New Jersey, a Preliminary Assessment is required to mitigate the client of environmental liability, in addition to a Phase 1 Environmental Assessment and a Phase 2 Environmental Assessment.
3. Engage a structural engineer.
After addressing environmental liability issues, legal counsel should advise you on engaging a structural engineer. The use of a structural engineer can help ensure the safety and longevity of buildings and structures. A structural engineer is vital in commercial real estate for many reasons, such as to review the structural integrity of the asset, surveys and any other asset inspection reports, engineering or otherwise, that the seller has within its possession. Often, a structural engineer will conduct a Property Condition Assessment (PCA+), in which the engineer reviews a commercial property’s systems to evaluate items that can impact the value of the building. These items may include the foundation, roof, HVAC, plumbing, electrical, landscaping, fire systems and more.
4. Consider investment risks.
In a larger sense, considering risks associated with the commercial property is quite important. Understanding that these risks vary, even among similar buildings in similar areas, can help with assessing the potential value of your investment with a clear head. Asking the right questions ahead of time can help ensure that your investment does not create too much risk. Reviewing the property’s profit and loss statement, real estate taxes, utility statements and any other common area maintenance invoices is important when assessing the financial condition of the property.
5. Perform due diligence for permits and title.
Local ordinances for permits also vary among different jurisdictions. These processes can take a few weeks to a few years, so understanding your local timeline and beginning the permit process early can help abate potential issues down the road. Legal counsel must order a title search to determine whether any title defects exist to ensure that a clear and marketable title transfers at closing to the client.
6. Identify financing.
It is vital that a client identifies different financing sources well ahead of entering a Letter of Intent (LOI) and contract in order to avoid delay during and after the contract process. This way, once a contract is entered, the client may turn to a financing source very quickly to secure financing for the transaction and know with certainty that the transaction will be financed. A delay in securing financing can result in a delay (or a missed opportunity) securing the desired property. Legal counsel can help you consider options when it comes to financing