Planning to purchase an office building, warehouse, manufacturing facility, retail store, restaurant or other commercial property? The following checklist suggests the kinds of information you will need and the steps you should take to reach an informed decision and prepare for a successful transaction.
Title:
Secure back title information (existing title policy of seller and/or title search/commitment commissioned by realtor or other third party)
Run down title to date, review searches for encumbrances/restrictions of record and identify any endorsements needed
Identify type of deed to be received from seller (almost always preferred: a bargain and sale deed with covenants against grantor’s acts)
Survey:
Order survey or arrange to obtain survey commissioned by others (update may be required)
Review survey to identify any encroachments not shown by title commitment
Note location of any easements
Appraisals:
Secure any existing appraisals
Commission independent appraisal to confirm market value
Building/Property Inspection:
Secure any architectural plans, square footage certifications, drawings and specifications in seller’s possession, as well as any building or site inspection reports (eg roof, mechanical systems)
Arrange for a current inspection performed by a reputable commercial property inspector with focus on walls, roofs, HVAC and fire suppression
Identify any past/current building, fire and safety code violations at the site
Environmental:
Secure from seller and/or others any existing environmental reports and tests, including soil, water, radon, mold, lead paint and asbestos
Ascertain whether a Phase I environmental investigation by a reputable environmental inspection firm has been performed and assess need to update or secure independent Phase I report
Make inquiry with respect to the existence (past or present) of any underground fuel tanks
Make inquiry with respect to any history of environmental hazards (eg oil spills, chromium, PCBs) and remediation of same
Zoning, Permits and Approvals:
Confirm that intended use of the premises is permitted in the subject zone
Confirm any required ADA compliance
Ascertain what approvals and permits may be required to perform any build-out (whether for owner/occupant or tenant) including whether site plan approval is required (and estimate timeline for approval)
Secure from seller any historical, current or pending applications/documents related to permits, licenses and approvals and ascertain status of any current discussions with municipal officials concerning same
Ascertain whether new or continued certificate of occupancy will be required upon transfer
Building Operation:
Three years worth of financial statements for the property
Real estate tax bills for the last three years
Aged receivables (2-3 years)
Utility bills (2-3 years)
Report with respect to capital expenditures for the property during past years
Current operating and capital expense budgets for the property
Insurance information, including all policies currently in effect by owner and by tenants pursuant to leases
Tenants:
Copy of all leases and related guaranties
Copy of rent roll (will contain some of items below)
Standard form of lease used by owner
List of Security deposits
List of any options or rights of refusal given to tenants
Schedule of any and all concessions or accommodations made to tenants, including free rent, rent reductions, upgrades, etc
List of each tenant’s pro rata share of common area maintenance charges and expenses above base year
Information with respect to any pending leases or letters of intent to lease
List of all commissions owed to brokers
Financial statements and credit information supplied by tenants and guarantors
Miscellaneous Other Documentation To Be Secured From The Current Owner:
Notices of any new or special assessment or taxes
Any service contracts (e.g. for HVAC, landscaping, garbage, recycling, security system) relating to the operation of the building or the site
Information with respect to any pending hazard or liability insurance claims
Notices with respect to exercise of any right of eminent domain by the State
Schedule of all furniture, fixtures and equipment included in sale
Information with respect to any pending property tax appeals
Information regarding any planned road construction in the immediate area
Potential Claims:
Investigate history/status of any litigation affecting the property or disputes re: prior deals or agreements
Determine whether any releases must be delivered from prior terminated contract purchasers as a condition precedent to closing
Ascertain status of any pending foreclosure action and bank’s willingness to forebear from further prosecuting the action pending the closing of sale
Entity Formation/Organization:
Consult legal and accounting professionals to determine type of entity (eg limited liability company, limited partnership) that will take title to the property
If entity is unformed, prepare/file certificate of formation with proper State authority
Obtain employer identification number (EIN) for entity and perform necessary New Jersey business registrations
Prepare governance agreement and related organizational documents (e.g. LLC operating agreement and by-laws)
Prepare appropriate resolutions for entity to enter into agreement of sale, close sale transaction, take title and enter into any lease agreement(s) with tenant(s)
Note: The above list is a basic guide only and is not intended to be exhaustive (e.g. financing of purchase is not covered) The particulars of the proposed transaction, the type of property and the attendant circumstances will control the actual due diligence checklist to be prepared and utilized. Consultation with qualified professionals, including Finestein & Malloy, LLC, is recommended.