You may be looking to buy real estate for your new office, retail store or other business. A common mistake many people make after finding property they like, is to sign a purchase agreement prepared by a realtor and then bring the signed agreement to their attorney for review.
Once the purchase agreement is signed by the buyer and seller, it is binding upon both parties. There is little that an attorney can do to revise or amend the terms and conditions of the signed agreement other than make sure that the purchase goes in accordance with that agreement.
The real estate purchase agreement, also called an offer to purchase, is the single most important document in the purchase of real estate. All of the terms and conditions that govern the purchase are in that agreement. The time to have a real estate purchase agreement reviewed by your attorney is before you sign it. The following are some issues to address when considering the purchase of commercial real estate:
Know what you are buying.
Make sure that you are aware of exactly what you are purchasing. Is the land a separate lot or a condominium? If the property is a condominium, review the master deed, condominium association bylaws and other condominium documents. Your business may not be permitted by the condominium organizational documents. Is the lot in a plat with subdivision restrictions that may hinder your use of the property? If there are fixtures or other personal property, do they come along with the sale of the real estate?
Are you buying just the building or also the land under it? Some office developments, especially medical offices around hospitals, are subject to long-term land leases, such as for fifty or one hundred years. If that is the case, at the end of the lease term, the land and building may revert to the owner/lessor of the land, typically the hospital. In that instance, you are not really buying real estate. All that you would actually be purchasing is a leasehold interest for a term of years that is depreciating in value, not appreciating like other real estate.
In addition, make sure you know that the zoning is proper for your intended use. If you are purchasing a building with an existing use the same as your intended use, zoning may not be an issue. Some municipalities have special requirements for certain businesses or uses, such as additional parking, a roadway turning lane which is very expensive or special land use approval. If you plan on constructing any expansion of the building, make sure there is enough land pursuant to the zoning requirements to accommodate your new construction. If you plan on remodeling, can it be done without any extraordinary expenses to comply with municipal requirements.
Are there existing tenants in the property? If so, what are the terms and duration of the leases? Are the tenants in the space you want to occupy so you have to evict them before you can move in?
Have appropriate contingencies in the purchase agreement.
Your purchase should be contingent upon a stake survey, even if it is a small city lot. You should know where all four corners of the property are located. “Mortgage” surveys are not enough, since they do not necessarily disclose the four corners of the property. Major lot line discrepancies are regularly discovered with surveys in which all corners of the property are “staked”.
The sale should also be contingent upon the legal review of the title to the property. You want clear title to the real estate. Surprise liens from the IRS or a mortgage lender are unwelcome guests after you purchase the property.
A contingency for an inspection of the building and property should also be included in the real estate purchase agreement. You do not want to have to be forced to purchase a building which is unsafe or requires substantial repairs just because you signed an agreement to purchase the property “as is”.
The sale should be contingent upon environmental testing. You do not want to find out later that you have to pay for an environmental clean up. For example, I was involved in a recent commercial real estate purchase in which it was discovered that a gasoline service station used to be located on the site. The purchaser had the property environmentally tested. Luckily, when the underground gasoline storage tanks were previously removed, there was no residual contamination. However, the testing did discover some minor contamination under a parking lot that did not pose any health or environmental risks. Because the contamination was minor and the purchaser did the proper testing and filings with the appropriate governmental agencies, the purchaser was not required to clean it up, nor will the purchaser ever be responsible if it ever has to be cleaned up.
You should include a contingency for radon testing if you have a crawl space or a basement that could have you or your employees exposed to this toxic gas.
If anything is discovered in these contingencies that is unsatisfactory, you can walk away from the deal and get your deposit back. Or you could use the results to re-negotiate the purchase price.
Know what your purchasing costs are.
In addition to the purchase price, your purchase agreement should state who is paying which closing costs. You do not want a surprise at closing that you did not anticipate. Try to negotiate that you are paying as few of the closing costs as possible. When you are a buyer, you want to have the seller pay most, if not all of the closing costs. There are usually a title or mortgage company closing fee and other closing costs. The purchase agreement should clearly spell out who is going to pay them, preferably the seller. Similarly, make sure it is clear who is going to be paying any document recording fees.
Make sure that the seller is going to provide title insurance at their expense to ensure that you get clear title to the property. The real estate transfer taxes should similarly be paid by the seller. All general real estate property taxes and special assessments should also be paid off by the seller at or before closing.
If general real estate property taxes are going to be prorated, make sure you know if they are going to be calculated in arrears or in advance. If they are generally paid in advance, request no proration of the taxes. On the other hand, if the taxes are generally paid in arrears, you may want to have them prorated so that you may get a credit at closing.
Know what your ongoing costs will be.
You must recognize that when you purchase real estate that has a taxable value less than the state equalized value, your general real estate property taxes will likely go up. You will be paying future property taxes based upon the state equalized value of the real estate, which is not necessarily one-half of your purchase price.
Review historical utility, maintenance, insurance, cleaning, lawn and landscape care and other recurring costs. If you are in a condominium complex, there typically are monthly association dues. Similarly, if you are in a multi-unit commercial development, there may be deed obligations for common area expenses such as the maintenance of a shared parking lot.
What is your monthly principal and interest payment on your mortgage. Make sure that you are aware of all ongoing costs before you obligate yourself to purchase the property.
By: Matthew M, Wallace, CPA, JD
Published edited September 18, 2011 in The Times Herald newspaper, Port Huron, Michigan as: Smart buyers invest first in research