Commercial Real Estate Closings
While individuals and businesses involved in a commercial real estate purchase or sale generally know that they need legal counsel, they might not recognize the need for an attorney with knowledge in related areas of law. While the scope of a commercial real estate transaction can range from simple to highly complex, our law firm brings knowledge and experience acquired by handling a significant number of commercial real estate transactions. Because of the diversity and volume of transactions we have handled, we know that thorough due diligence is critical, so we have identified some common mistakes made during this process.
Mistake #1 Failing to confirm the property complies with all code and regulatory requirements
Frequently, the buyer of a commercial property will begin improvements to get the premises repurposed for the particular business. During this process, the buyer will discover the property is not in compliance with existing legal requirements. When the contractor goes to pull the permits or an inspector comes to sign-off on the work, for example, building codes violations will be discovered. ADA violations also frequently slip through the cracks without a meticulous due diligence process. The cost of bringing the property into compliance can be so extensive that it brings the wisdom of the transaction under scrutiny.
Mistake #2 Failing to confirm the lender will accept inspection reports
When seeking inspections and reports, commercial purchasers often presume that the lender will accept the use of a particular third-party vender. Whether you are retaining an entity to perform an Environmental Report, a Property Condition Assessment, or other reports required by the lender, get preapproval that the third-party vender is acceptable can save value time and money.
Mistake #3 Arriving at an improper valuation of the property
There can never be too much research into the valuation of the commercial property. This process should involve working with leading commercial brokers in the market and conducting an extensive review of sales comps. The process of revising and refining the valuation should continue as new information comes in through the due diligence process.
Mistake #4 Accepting that the seller and the seller’s agent have fully disclosed all existing issues
The seller looking to maximize the return on the sale of the property should not be expected to disclose all defects and issues with the property. A thorough investigation is essential to uncover any problems that could impact a decision to move forward with the transaction.
Mistake #5 Neglecting to inspect every unit of the commercial property
Whether you are purchasing a strip mall or an office building, you should examine every single unit. While the seller might resist this request based on concerns about not disturbing the tenants, there is no way to know what problems might lurk within individual units without examining the premises.
Mistake #6 Overlooking the need to thoroughly analyze the competition
Accuracy in valuation or underwriting of the transaction requires a thorough review of the competition, particularly in an unfamiliar area. This investigation might uncover discounts or lease concessions that could raise red flags relevant to the valuation.
Mistake #7 Not anticipating the need for changes in the closing statement
The buyer needs to carefully review all entries listed on the closing statement and note any items that might have been omitted. Sellers often will be meticulous in itemizing credits in their portion of the closing statement but far less diligence when it comes to buyer credits. Common examples might include leasing commission owed to brokers and agents or improvement allowances owed to tenants.