The purchase of real estate is a complicated matter. Often, what is important to one purchaser will not be important to another. For example, a purchaser's concerns will vary depending upon whether the property will be used for agricultural, residential, industrial, retail office or other commercial purposes. This article highlights certain key issues which a purchaser should consider carefully before entering into a written offer to purchase commercial real estate.
1. Environmental Matters: Is the purchaser (or seller) aware of any environmental problems associated with the property?
A prudent purchaser will obtain a Phase I Environmental Site Assessment. If the environmental report indicates potential environmental problems, the purchaser may not wish to purchase the property. In the alternative, the parties may decide to obtain a Phase II report to determine the nature and extent of any potential environmental problems and the estimated remediation costs. If the purchaser encounters environmental problems and still wants to purchase the property, some of the purchaser's options include negotiating a lower purchase price; requiring that problems be remediated, at seller's expense, prior to closing; establishing an escrow account at closing to pay for property clean-up costs; and requiring the seller to indemnify the purchaser for any future remediation costs.
2. Financing: How will the purchaser finance the acquisition of the property?
Financing usually takes one of several forms: (a) conventional mortgage financing; (b) raising investor capital through a private or public securities offering; (c) locating a small number of money partners; (d) obtaining unconventional financing, which is more expensive and appropriate with riskier ventures; (e) obtaining seller financing where the seller sells the property to the purchaser on land contract, or transfers title to the purchaser and takes back a first (or second) mortgage. When obtaining financing, the purchaser wishes to avoid personal liability, if at all possible. In addition, the purchaser will be concerned with the interest rate, payment terms, amortization period, balloon payments, prepayment penalties, payment of taxes and insurance proceeds directly, as opposed to establishing an escrow account, notice and cure periods in the event of a default, and similar matters.
3. Choice of Entity: How will the purchaser take title to the property?
The purchaser could form a corporation, S corporation, limited liability company, limited partnership, general partnership, or take title in one or more individual names. The choice of entity for purchasing the real estate will depend, in part, upon the use of the real estate, the number of purchasers/investors, and whether the real estate will be used by the purchaser or leased to a related or unrelated entity.
4. Title Matters: Can the seller deliver good and marketable title to the property, free and clear of all mortgages, liens and encumbrances?
The purchaser will want to obtain an owner's policy of title insurance to make sure that the title is clean. The purchaser may encounter issues such as existing tenants, options to purchase the property, mechanic's liens, tax liens, foreclosure and redemption issues, undesirable easements or building and use restrictions, or other matters which may cloud title or make the property unsuitable for purchaser's intended use.
5. Survey: Is there a current staked survey of the property?
The purchaser will want to make sure that the purchaser is buying exactly what the purchaser thinks he, she or it is buying. A good survey will indicate whether there are any encroachments onto or off of a property line, whether there are any set-back violations of local zoning ordinances, the location of all utilities and recorded easements and other potentially important matters. This information could be critical if, for example, the purchaser plans a future expansion which would encroach upon existing easements or violate set-back requirements.
6. Inspection: Will the purchaser have an opportunity to inspect the property thoroughly before deciding whether to complete the sale?
The Purchase Agreement should give the purchaser broad rights to inspect the property for structural defects, heating, cooling, electrical, plumbing and mechanical problems, environmental matters, soil analysis, and anything else which may be of concern to the purchaser.
7. Purchase Price: How will the purchaser determine how much to pay for the property?
Possibilities include obtaining an independent appraisal, using a broker, formally or informally, to determine market value in the area, independent market research and personal knowledge and experience.
8. Utilities Are all necessary utilities available to service the property at no additional cost or inconvenience to the purchaser?
9. Zoning: Is the property currently zoned for the purchaser's intended use? If not, how difficult would it be to change the zoning or obtain a variance from the local Zoning Board of Appeals?
These are issues of time, money and probability which could affect the purchaser's purchase decision.
10. Permits: If the purchaser intends to improve the property with building or other structures, will there be any problem in obtaining the necessary governmental permits and approvals?
This will depend upon zoning, current building code violations and other matters which should be investigated and resolved to the purchaser's satisfaction before closing.
11. Licenses: Does the purchase of the property include the transfer of a liquor license or other license which may require prior governmental approval?
If so, obtaining such approval should be a condition precedent to closing.
12. Tying up the Property: Does the purchaser want to purchase the property outright?
Possible alternatives include obtaining an option to purchase the property, whereby the purchaser will have the right, but not the obligation, to purchase the property during a defined period of time. The purchaser may also enter into a short-term or long-term lease with an option to purchase the property. This way, the purchaser can use the property before deciding whether to buy it. Many potential purchasers obtain a right of first refusal, often as a part of a lease, whereby the seller/landlord must permit the purchaser/tenant to purchase the property first, if the seller/landlord receives a bona fide written offer to purchase the property, upon the same terms and conditions contained in the offer.
13. Legal Advice: Has the purchaser retained an attorney to assist in purchasing the property?
A prudent purchaser will consult with an attorney before submitting an offer to purchase real estate. A well-crafted offer will help protect the purchaser's interests, and guarantee the purchaser an opportunity to address and resolve pertinent issues prior to becoming obligated to acquire the property. The most common mistake a purchaser makes is signing a binding Purchase Agreement before consulting with an attorney, since the Purchase Agreement sets forth the material rights and responsibilities of the parties in connection with the transaction.
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