Top 10 Questions to Ask Before You Buy Commercial Real Estate

Obviously there are many more than just 10 questions you should ask before you purchase commercial real estate. Depending on the type of property you plan to buy, the location, the age of the property, and what your intended use is, there is a great deal of specific and important information you should know. Below you will find a list of the universal top 10 questions you should be asking before you close the deal.

  1. Is title clear? An Ownership and Encumbrance report can be quickly and easily obtained prior to writing an offer to purchase a property. During the due diligence period, the buyer will be furnished with a full title report disclosing all encumbrances against the property. Be sure you have clear title and will be granted a “General Warranty Deed” for the best protection.
  2. Does the survey match the described property lines? All too often a seller is not aware of the exact property lines. Have the seller provide a survey to ensure the neighbor has not built on the property or vice versa.
  3. Is there insurable access to the property? Many people believe that if there is a road to the property, access is not a concern. In Colorado with so many businesses being located in rural areas with limited road access, actual access to the property is much different than insurable access to the property. If there is not insurable access, you may encounter problems in the future when you attempt to develop, finance or sell the property.
  4. Does the zoning code allow for your proposed use? You should verify with the city or county that the zoning code permits your intended use. Re-zoning a property is something that can be done in some, but not all cases.
  5. Are there any environmental concerns? A  “Phase I environmental assessment” should be obtained. Depending on the results of the Phase I report, a Phase II environmental assessment may be required. Do not assume that because the property has never been used as a gas station, dry cleaning business or other type of business that has a higher likelihood of contamination that there are no environmental concerns with the property.
  6. Are there code enforcement liens, expired permits, unsatisfied development or easement obligations, or unpaid municipal liens that may create potential legal liability for you, as the owner? This falls in line with the above mentioned title question, but is worthy of its own questioning. Some code enforcement liens may attach to all property owned by that property owner and is not limited to the property that is in violation of the code. This is referred to as “cross attaching.” If the seller owns property with a cross attaching super priority code enforcement lien against one parcel and you purchase another parcel from the seller, the property may be subject to the lien. Again, you should always ensure you are receiving a “General Warranty Deed” this will protect you against all liens or encumbrances against the property, even from before the current seller held title to the property.
  7. Are there any major issues with the building? Such as the roof, electrical, pluming, fire sprinklers, elevator, HVAC, etc. You should obtain inspections so you can evaluate any repairs that may be required. Due diligence documents should also be requested pertaining to the above mentioned systems and improvements. This will give you a glimpse at what the owner has taken care of, or neglected.
  8. Are there tenants? If so, carefully review each lease agreement to determine the landlord and tenant obligations, if the tenant has a right to purchase or relocate, or if the tenant has exclusivity. You should also determine if the tenant has paid a deposit or advance rents and obtain a tenant estoppel letter.
  9. If there are tenants, is there a rent roll? In commercial property sales it is important a log of tenants as well as their deposits and charged expenses is passed along with other operating data in order to ensure accuracy of accounting moving forward.
  10. Is there a detailed record of operating expenses and other financial records pertaining to the property? Once again, having these financial documents dating back prior to your ownership of the property will ensure accuracy in accounting and when making income projections. Usually these financial records have an impact on the value of the property so it is likely the seller will have them readily available upon request.

Even the most seasoned investors will over look at least one of these details when trying to purchase a property without having professional representation. This can be a costly mistake when dealing with the ramifications, such as having to move a business due to zoning or having to remove and relocate an improvement due to property lines. When working with a knowledgeable commercial real estate broker these questions and more will be answered for you. Always work with a broker!