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While there are many elements not contained in this list that are important for specific transactions, the following are the most common contingencies and associated due-diligence, we encounter when representing a buyer or a seller during a sale of a commercial property:

  • Financing: Financing is an important part of most transactions. Lender pre-approval is best achieved for buyers prior to entering into negotiations. When an escrow is opened the contingency period should be sufficient to gain loan approval from the lender selected.
  • Disclosure: We use the AIR, (American Industrial Real Estate Association), Property Information Sheet, and the AIR Mandatory Seller Disclosure Statement, for seller disclosure to buyer during transactions. Building inspection contingency tracks from receipt of this document. Sellers most often purchase a "Natural Hazard Disclosure Report" rather than to research and represent those elements themselves. We obtain that report at a discount as AIR members.
  • Physical Inspection: We work closely with buyers to make sure appropriate inspections take place. Depending upon the buyer level of experience and expertise, we commonly use a commercial building inspection company, various contractors, and facilitate roof and HVAC inspections.
  • Hazardous Substance Conditions Report: This report is commonly known as the Phase I Environmental Report. The Phase I in certain instances can trigger Phase II investigation, and if needed, Phase III cleanup. If environmental contamination is discovered, the engineer or contractor is legally mandated to report the contamination to a "lead environmental agency". These agencies accept responsibility to review data and insure cleanup. The file is usually opened with the appropriate agency. Agencies are similar to stair steps with each step based on the magnitude of the problem. Common agencies with which we work are City Health Departments, City Fire Departments, County Health Departments, County Fire Departments, County agencies, State Department of Toxic Substance Control, DTSC, and the State Regional Water Control Board. If cleanup is required, it is not possible to get a "clean" Phase I Environmental Report until a "No Further Action" letter is received from the lead agency. No lender will lend, nor do we advise buyers to buy, without a clean Phase I.
  • Soil Inspection: People commonly assume that soil inspection is related to environmental, but it actually associated with Geo-Technical, which is soil condition as it relates to "build-ability". If construction is to take place, the land is tested for foreign dirt, foreign material and compaction. If located inside the Alquist-Priolo Earthquake Zone, additional inspection must take place. Soil inspection typically is done when vacant land is purchased, or additional construction will take place in addition to a building on site. This type of inspection is not common when there is an existing building unless there is an addition planned or it will be razed for new construction.
  • Governmental Approvals: Depending upon the buyer's objectives, some form of governmental approval is necessary. If the buyer is an occupant that will operate a business in this location, a business license is required. We need to insure the buyer can operate in that zone and that location. The license should be obtained prior to removal of that contingency. If construction is planned, preliminary plan approval is the least that will be required, and in some instances, construction plan approval may be a condition. An additional element for review can be the City or County "Land Use Plan", Zoning, restrictions, Conditional Use Permit requirements, permits from other agencies, and a wide variety of elements to review or permits to achieve. The planned use will determine the scope of approvals and types of permits required.
  • Conditions of Title: Approval of the Preliminary Title Report is a condition of closing an escrow. Plotting easements is an element of that approval as is investigation of other recorded matters. The survey mentioned below is a condition of an ALTA Policy, which extends coverage and includes physical inspection of the property to insure there are no encroachments. Other conditions include CC&Rs, which are covenants, conditions and restrictions. They limit use and contain certain requirements. They are common with condominiums and Planned Unit Developments.
  • Survey: Surveys are ordered when construction will take place or if e an ALTA Title Policy will be purchased. Most smaller property purchasers don't order surveys, but they are common for unimproved land and larger properties.
  • Existing Leases and Tenancy Statements: Due diligence for an occupied property will include copies of existing leases and "Estoppel, or Tenancy Statements". There are a multitude of reasons to obtain an Estoppel Statement, and lenders commonly require them. Lender approval commonly requires an "Attornment and Non-disturbance Agreement". These agreements protect both the rights of the lender and the tenant.
  • Owner's Association: If the property is a condominium, town house or in a Planned Unit Development, there are commonly Association By-laws and CC&Rs as well as Association financials, budgets and Board Minutes the buyer must approve.
  • Other Agreements: If the property is encumbered by any other agreements, they must be disclosed and approved by the buyer. A common agreement might be an HVAC contract that is for a time period rather than "at will" or as long as a certain owner owns the property. Any agreements to which the buyer may be bound should be investigated and approved.
  • Existing Notes: If the buyer plans to assume an existing note, it must be investigated, evaluated and approved.
  • Personal Property: If personal property is included, the buyer must approve the list and the condition, and there are other UCC requirements.
  • Financial Evaluation: An essential part of buyer due-diligence is financial evaluation of the transaction. If the property is to be developed, the development pro-forma is created, verified and approved before the buyer removes this contingency. The transaction should be evaluated from a tax perspective, and we often create operating proformas and internal rate of return evaluation, (IRR).
  • Legal Review: It is essential for legal review to take place. Every relevant legal document should be reviewed by counsel. It is important for the buyer to make an informed decision about transaction structure and how to take title. The attorney will help with a multitude of other tasks and elements outside Broker area of expertise.

It is our practice to work in conjunction with experts who provide specific expertise, and to facilitate evaluation, and satisfaction of any concern regarding a property, transaction structure, maintenance requirements, condition, use, costs, financing, and a multitude of other concerns. We recommend you do the same. Disclosure of every pertinent element is not only prudent, but essential, and each property has its own specific concerns. We must know what to expect to complete a transaction. Appropriate investigation and disclosure helps avoid disappointment, dissatisfaction and disputes. Proper conduct of the sale transaction eliminates misunderstandings, eliminates conflict, and helps buyers to understand every element of the transaction and the property prior to being obligated and subsequently completing the purchase. Litigation takes place as a result of misunderstanding, poor communication, and failure to disclose. Properties are seldom perfect, but as long as buyers are provided complete information they can make reasonable decisions and be prepared to handle problems as they emerge.

This outline is intended to be an educational overview of elements to be investigated when buying and selling commercial real estate. It is not intended as a check list or to substitute for good judgment, advisors, experts, legal counsel, accounting and tax consultation or for any other element of a transaction. This is provided to educate and help transaction participants to seek the appropriate expert assistance when buying and selling real estate, as well as to gain a modicum of understanding regarding transaction due-diligence associated with the most likely contingencies. It is not intended to be an expansive list of every element to be investigated. Your advisors and experts will assist you in understanding the breadth of concerns and nuances of any transaction in which you might be involved. Reliance on this document does not create an Agency Relationship between you and O'Healy Commercial Real Estate Services, and O'Healy Commercial Real Estate Services and Patrick O'Healy shall sustain no liability as a result of it.