Pitfalls To Avoid When Purchasing Commercial Property With A Business

Many businesses that are for sale have commercial property attached to the deal. Purchasing a piece of commercial property in conjunction with purchasing a business is something that adds an additional layer of complexity, but your Broker will be equipped to help guide you through the process. There is a Commercial Real Estate Contract that will need to be executed, in addition to the Business Asset Purchase Agreement. The Due Diligence period will also need to include items relating to the commercial real estate transaction. We’ve outlined the most common items that can potentially cause issues in a commercial real estate transaction, but by no means is this a complete or exhaustive list. 

Title or survey concerns. 

The Seller will be expected to provide the Buyer with their current title insurance policy, as well as the most recent survey done on the property. If there isn’t a recent survey, then the Buyer will need to order one as part of the closing process.A title commitment will be given to the Buyer, once the title company or insurance company has completed all of their searches. A thorough review of the title commitment and all of the documents referenced in it is critical. Some title concerns may include: mortgages, liens, judgments or assessments against the property, probate issues, pending lawsuits or foreclosure suit. The Commercial Contract will provide a Buyer with a period of time for title review. Please note that it is normal for title companies or closing attorneys not to do their searches and provide title commitment until after the Due Diligence period has been completed, because many deals will fall apart during the Due Diligence process. The survey should be ordered as soon as possible after the contract is signed and should be reviewed in conjunction with the title commitment. This allows a Buyer to determine if there are easements, encroachments, or other matters that need to be addressed.

Verify zoning and land use. 

The Buyer will want to make sure that current zoning and land use classifications allows them to use the property as they intend to. Buyers should also find out the permitted uses for adjacent properties as well, if possible. A Buyer can request a zoning verification letter from the applicable municipality to obtain valuable information as to the pertinent zoning and code related matters. Making sure that the property can legally be used as intended is one of the most important things to verify during the Due Diligence process. If someone is buying commercial property that is owned by the business they are purchasing, the current owner would be responsible for making sure that it is operating legally, so any zoning issues should hopefully be able to be cured by the Seller before closing. If there are zoning issues that are not curable, then the Buyer would have the right to cancel their contract and receive their earnest money deposit back. 

Environmental Concerns.

It is important for a Buyer to identify if any environmental concerns exist at the property. Especially if it is an industrial site or a commercial property that has dealt with hazardous waste, like an auto repair or body shop. If there are questions of environmental concerns, a Phase I Environmental Assessment should be obtained. Depending on the results of the Phase I report, a Phase II or Phase III Environmental Assessment may be required. Do not assume that because the property has never been used as a gas station, dry cleaners, or other type of business that has a higher likelihood of contamination that there are no environmental concerns with the property. These environmental inspections and assessments should all be done during the Due Diligence Period. 

Issues with liens, expired permits, or licensing.

Buyers will want to investigate if there are any code enforcement liens, expired permits, unsatisfied development or easement obligations, unpaid municipal liens for such things as water, electricity, sewer or gas that may create potential legal liability for the new owner. The title company or closing attorney will do a search for liens, but it doesn’t hurt to personally look into all of these items individually. Also, if the business has complex licensing, like liquor licenses, there are professionals who specialize in helping Buyers verify and obtain the proper licensing to operate their business. When purchasing a business along with commercial real estate, the Seller agrees to assist the Buyer, at Buyer’s cost, with getting all of the licensing in order. If a Buyer doesn’t know all of the licensing required to operate the business they are purchasing, the Seller will always be one of the best people to ask, since they know what licensing they have been required to have. 

Physical inspections of the buildings, equipment, and property.

Are there any major issues with the building, roof, electrical, plumbing, fire sprinklers, elevator, HVAC, etc? Buyers should obtain inspections completed by licensed and insured professional inspectors, so they can evaluate any repairs that may be required. If repairs or replacements are needed, the buyer would then want to get quotes from appropriate contractors, so that they are aware of what those costs might be. Those quotes or estimates can then be used to go back in and re-negotiate with the Seller. If the repairs need to be done to legally comply with code or permitting, then the Seller will most likely need to make those changes before closing, since they are contractually bound to make sure that the business is operating legally. If the needed repairs are health and safety-related, then it might be something for the Seller to consider fixing before closing as well. At the end of the day, commercial property is sold as-is, so the Seller doesn’t have to agree to repairs (unless they are not currently operating legally), but the Buyer can always ask for repairs or a reduction in purchase price, so that the Buyer can make the repairs after closing. Sellers are most likely not going to agree to cosmetic improvements or repairs that aren’t health and safety-related. 

The Buyer is ultimately responsible for doing any and all Due Diligence on the business as well as the commercial property, and they have the option to get other professionals involved to assist them, such as a CPA, attorney, building inspector, license expert, etc. It is then the Buyer’s option to either re-negotiate, cancel the contract, or move forward, lifting the Due Diligence Contingency. The Broker will be able to help with that portion of the process.