Investigating Commercial Property
A prospective purchaser can ascertain the basic legal description from the county records, however, this description does not reveal access rights or restrictions, easements for utilities, possible limitations for development, nor does it account for recent changes.
As such, purchasers should order a survey, prepared by a surveyor who is licensed by the state and meets all required professional standards of the property, and review the surveyor’s map and report as part of the buyer’s due diligence.
Generally, a bank or an experienced developer will require the land and building be appraised in order to establish the purchase price for the transaction. Surveys can be viewed as appraisals of the land, though not always required, very important to consider if there was not one performed recently (i.e. last five years). They are also required for most title endorsement required by lenders and can eliminate the need for seller’s to absorb liability, which they are reluctant to do.
Property Condition Inspection
Buyers should be aware that it is the buyer’s responsibility to arrange any inspections of the property at issue, not the attorney. However, the attorney’s job is to protect the client’s interests which includes reminding the buyer to undertake the necessary inspections during the due diligence period, provide guidance on how to proceed in obtaining the inspections, and advise on how to address any problems that these inspections reveal.
Availability of Necessary Permits
Federal, state, and local government entities impose a multitude of restrictions regarding land use. These restrictions often lead to a buyer needing to acquire various permits and certificates, even if the buyer plans to continue the seller’s use of the property. Obtaining these necessary permits is magnified if the buyer intends to change the use of the property or engage in excavation, construction, or demolition on the property. The responsibility of acquiring these permits is disbursed between the buyer and other professionals involved.
- The purchaser must obtain a valid certificate of occupancy that permits the intended or existing use(s).
- Architects or contractors must obtain the various other permits and certificates from the requisite governmental authorities for any construction matters to take place on the property.
- The attorney’s role here is to make sure that none of these matters fall through the cracks by coordinating with the purchaser and other professionals involved to ensure all necessary permits and certificates are properly obtained.
In relation to the property inspection and obtaining all necessary permits, the prospective purchaser’s attorney needs to confirm that local zoning laws permit the use that the buyer intends to make of the property. If the purchaser’s planned use will not comply with existing law, the attorney needs to determine whether a variance, a special use permit, or a rezoning of the parcel is likely available. If one of these options is feasible, then the attorney needs to ensure that the purchaser pursues this option in accordance with the terms of the contract.
A Phase I Environmental Site Assessment is a tool to determine whether the property to be purchased is contaminated. Many commercial lenders require this environmental due diligence to be completed before they will issue commercial loans. Even if a lender is not involved in the transaction, this environmental due diligence is recommended to prevent future liability for existing contamination on the property.
A Phase II Environmental Site Assessment addresses “Recognized Environmental Conditions” that are revealed during the Phase I Assessment. Phase II Assessments typically involve conducting a subsurface investigation and collecting soil and groundwater samples which are then analyzed for possible contaminants. Some of the most common properties to require a Phase II inspection are sites on which gas stations historically operated.
Not every prospective purchaser needs to have a Phase II Assessment conducted.
Existing Leases & Contracts
The prospective purchaser of an office building or shopping center that has existing tenants holding leasehold interests should collect and review every lease during the investigation period. The buyer’s attorney should thoroughly review a prospective buyer’s (Landlord’s) obligations as it will be deemed to be on notice of the rights of any prior tenant of which it has actual or constructive notice, and those rights include all rights set forth in the lease.
The buyer must also be certain that existing contracts affecting the property can be assigned to the buyer, and, if so, whether the consent of a third party is required before the contract rights may be assigned. Some existing vendor arrangements may not be suitable or favorable for the buyer to assume due to conflicts of interest, conduct of business, or other reasons. A thorough investigation into a seller’s business operations should reveal major outliers to cure prior to closing.
Financing | Review of Lender Documents
Default | When executing a promissory note for a loan that finances a commercial real estate purchase, the buyer should carefully read the note regarding what will constitute a default. The note should clearly specify what when the buyer-borrower’s failure to satisfy an obligation under the note rises to a level of an “Event of Default.” An “Event of Default” triggers the lender’s ability to utilize any of the remedies specified in the note.
Notice and Cure Period | Borrowers may request for the lender to provide a notice of their default and a period of time to cure the default before exercising their remedies. Lenders may respond that different types of default merit different answers to these requests. Intentional and incurable defaults will instantly rise to a level of an Event of Default because the borrower knew that it was violating the terms of the note and now cannot take any action to fix the violation. Borrowers have a better chance at being granted a notice and cure period in instances of minor breaches. For example, a lender could remedy a missed payment due to the borrower’s administrative carelessness by assessing a late payment fee. However, should the borrower persistently miss payments, then this breach could rise to an Event of Default.
Usury Laws | Usury laws are regulations that govern the amount of interest that may be charged on a loan. Usury laws vary from state to state and the penalty for violating these regulations can be devastating, ranging from lowering the interest rate to the maximum rate allowable, to forfeiture of the interest altogether, or even to forfeiture of the principal of the loan. Lenders should protect themselves from violating these regulations by including language in the note that confirms that in the event the interest rate ever exceeds the amount allowed under state law, the interest rate will automatically be reduced to the highest rate permissible.