Making an Offer on a Commercial Property: Frequently Asked Questions
Renata Helstoski, Member at Beattie Padovano, LLC
What does it look like to do my due diligence before making an offer to purchase a commercial property?
Once a buyer has identified a property of interest at a price which is acceptable, there are additional preliminary items to consider before making an offer:
- Demographics: The buyer will want to explore the local and regional demographics to become comfortable that the area supports the business to be operated.
- Seller’s Information: The buyer should ask the seller to provide any information in seller’s possession pertaining to the property, including, but not limited to, property condition reports, environmental reports, title policies and reports, surveys, site plans, architectural and engineering plans and drawings, warranties, leases, contracts and other relevant documents.
- Structure and Site: The buyer would want to have at least a preliminary inspection of the building and site to confirm that there is nothing patently wrong.
- Utilities: The buyer should satisfy itself that utilities exist or will be available to the site in adequate capacity.
- Local Land Use and Other Laws: The buyer should confirm that the intended use and intended site changes, if any, are permitted under applicable laws, and, if not, what type of zoning and other land use approvals are necessary, as well as the likelihood and timing of obtaining those approvals. A discussion with local officials and residents may be warranted.
- Municipal Records: The buyer should review public records to determine if there are any outstanding building or other code violations or other municipal liens affecting the property.
- Environmental: The buyer should become familiar with the current and past uses of the property (and perhaps surrounding properties). If the seller is unable to supply recent environmental reports, the buyer should review public records and databases to determine any reported environmental concerns regarding the property and the surrounding area.
- Flood Status and Insurance: A buyer should know if the property is in a flood zone and if the property contains any other unique characteristics that could result in unusual or increased insurance requirements.
- Operating Business: If the property to be acquired is an operating business which the buyer plans to continue, it is critical to gather historical financial information about the operations as well as all relevant property documents and contracts which will be binding on the buyer, including, but not limited to, leases, rent rolls, and business and service contracts. The buyer should also determine up front the equipment or inventory to be included in the sale, if any.
- Financing: If financing is contemplated, a buyer should satisfy itself that it can likely be obtained on acceptable terms.
Every property is unique, and the list of preliminary items to consider will vary from transaction to transaction. If the prospective buyer is satisfied with its preliminary review, a “due diligence” contingency should still be included in the contract of sale to enable the buyer to perform a more extensive review of the property and to ultimately have the right to terminate the transaction for any or no reason at all.
From a contractual standpoint, what are the key differences between a commercial and residential real estate transaction?
In many cases, residential transactions will close much more quickly than commercial properties. The contingencies in a residential transaction are typically limited to financing, title, and property condition, whereas in a commercial transaction, there are often more complex considerations, such as use, governmental approvals, and other third-party approvals.
A residential property is typically a house that has been in existence, or one which is being built by a builder for occupancy by the buyer for personal use. Therefore, unlike a commercial transaction, there is usually no need to consider items such as governmental approvals, utility availability and capacity, leasing opportunities, and other business matters. A commercial transaction will also typically involve a much more detailed list of representations and warranties to be made by the seller, which a buyer would typically want to survive closing for a stated period.
A residential transaction requires many consumer protection type disclosures and legal requirements (e.g., private well, radon, lead paint, Megan’s Law and others) which are not necessarily applicable in a commercial transaction. A contract for a residential transaction is typically prepared on a preprinted broker’s form which must be accepted or rejected within 3 business days after both parties have signed the contract. This does not apply in a commercial transaction, and the duration of negotiations is typically more lengthy.
How do I go about exploring any zoning laws which might impact my ability to operate once I’ve closed on a commercial property?
If zoning laws are explored after closing, it is way too late. A buyer should be confident that all zoning laws have been reviewed and all necessary approvals are obtained prior, and as a condition, to closing.
What can I do to mitigate the risk of future disputes with neighboring businesses/property owners?
If zoning or other land use approvals are required, property owners within 200 feet of the project are given notice of the buyer’s application for approvals and an opportunity to be heard. Oftentimes the buyer/developer will agree to accommodate some of the neighbors’ concerns as a condition to the approvals being granted. Of course, a prospective buyer could also approach neighbors in advance of submitting applications to discuss their possible concerns, which, if feasible, can be addressed in connection with the initial submission of the application.
What other advice do you have for someone who is new to buying a building for commercial use?
Assemble a team of intelligent and experienced professionals to manage the process and make it as seamless as possible. Real estate transactions invariably contain unexpected circumstances, and if a buyer’s team of professions has the depth of knowledge and experience, the outcome, and the buyer’s experience, will be greatly enhanced.
What can I expect should I hire an attorney to help me navigate the process of purchasing a commercial property?
The purchase of commercial property involves many moving parts, and significant attention to detail is required. A buyer should expect his or her attorney to have the experience and resources available to understand and focus on the level of detail which is required to manage the various aspects of this process, so that the transaction does not become onerous, and the goal of a smooth, successful closing is achieved.
A Member of the Commercial Real Estate & Leasing Group at Beattie Padovano, LLC, Renata Helstoski focuses on general transactional law with an emphasis in commercial real estate. She handles the drafting and negotiating of leases, purchase and sale agreements, reciprocal easement agreements and associated documents. She also conducts due diligence reviews, including title and survey.
Renata’s practice is both national and local in scope. On the national level, she was a member of the legal team who represented a national retailer in connection with sale/leaseback transactions involving extensive property holdings across the country with a transaction value of approximately $250 million. She also represents a multi-national automobile and equipment leasing company in connection with leasing and disposition transactions throughout the United States. On the local level, Renata has represented several real estate developers in connection with the acquisition, financing and leasing of retail shopping centers, the sale of a project consisting of 28 acres in Bergen County for affordable housing, hotel, assisted living and office, the sale and development of a 210 acre tract of land for residential, hotel, office, assisted living and retail uses in Parsippany, New Jersey, the acquisition and redevelopment of a brownfields tract in Jersey City for use as a golf course, the development of a tract of land into 28 single-family lots and sale at a value in excess of $10 million, the expansion of multi-state supermarket operation, and numerous other transactions.
Learn more about Renata Helstoski, Member at Beattie Padovano, LLC, by visiting Renata A. Helstoski – Beattie Padovano, LLC.
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