Thursday, May 9, 2013

Must dos when purchasing a commercial building

I provide Location Advice to owners and occupants of manufacturing and warehouse buildings in Southern California. Today's post will deal with that "all important" must do list when purchasing a parcel of commercial real estate.

We will assume that you have made a decision to buy and have followed the  suggestions of a previous post on buying an industrial building. We will also assume that you have considered your financing source and have consumed the post on financing a commercial building.

You have agreed upon business points and have signed a letter of what? Hopefully, your location advisor will assist you though the process and will not just wait for escrow to close and the commission fee to arrive!

Generally and simplistically, here are the things you "must do".

Sign the Purchase and Sale Agreement: Also known as the PSA, deposit receipt, contract for purchase, escrow instructions, etc. I prefer the AIR Standard Offer, Agreement and Escrow Instructions for the Purchase of Real Estate. This document  is widely used in the state of California and contains succinct points on due diligence, financing, representations, warranties, remedies, deposits, liquidated damages, etc. Your contract should contain adequate time frames for you to secure financing and check out the building...structural (roof), environmental, title, operating systems (HVAC, plumbing, electrical, loading doors, fire sprinkler system), underlying liens, underlying financing, leases, etc. I generally ask for 30-45 days for "non-loan" approvals and 45-60 days for loan approval. The times are run concurrently from the opening of escrow (when both parties sign the PSA). Two items of note in the AIR PSA: Paragraph 7.1 obligates you as the buyer to use the services of the buyer's broker for a period of one year from the reference date...not big deal if you close...maybe a big deal if you don't. Paragraph 18.1 obligates the seller to pay a commission if contingencies are waived and you don't buy the building. I would suggest modifying or eliminating both of these paragraphs.

Open Escrow: You or your location advisor should deliver a signed copy of the PSA and any deposits to the escrow company listed in the PSA. As a buyer, you have some say in the title and escrow officer choice. I enjoy using a private escrow company because I get personalized service. My escrow company of choice is Heritage Escrow in Irvine, California. Janet Tilbury is extraordinary and my choice if you want to get the transaction closed with no brain damage.  Janet's phone number is 949.930.8501.

Order the Title Report (prelim) and the NHD: Your escrow officer accomplishes this for you. Once again, you get some say in the title company selected even though the seller pays for a standard owner policy. It is generally a good idea to have a real estate attorney review your prelim especially if the building you are buying is a condo, a PUD, or has an association. Any financing against the property will be removed at the close unless you are assuming the loan.

Review the NHD: The seller will provide you with a Natural Disclosure Statement which will tell you if the building is in a flood plain, seismic area, etc.

Conduct the necessary inspections, receive the reports and review and approve them: I would suggest engaging a company such as All West, Marc Cunningham to conduct a Property Condition Assessment (PCA). the PCA will review all of the building systems...HVAC, electrical, roof, foundation, plumbing, seismic, plumbing, elevators, sprinkler system, etc. and generate a report with any needed repairs and a capital expense schedule for the first five to ten years of ownership. Additionally, you or your lender will order a Phase I Environmental report which reviews the enviro history of the site and the previous uses. All West can also do the enviro but I would suggest routing this through the lender as some companies are not on the lender's accepted list and any loan made on the property will be subject to the environmental health of the building. The lender will also order an appraisal and any loan will be subject to a satisfactory appraisal at the agreed value.

Achieve a financing commitment: Make sure to build the appraisal and enviro approvals into the loan approval so that the time frame negotiated for loan approval includes receipt, review and approval, of the necessary enviro and appraisal reports. If you are seeking an SBA loan, there are actually three approvals...the bank, the CDC, and the SBA. I would suggest not waiving any loan contingency until ALL of these approvals are received.

Waive contingencies: You will receive a PCA with recommended repairs, you will receive a loan commitment. I would suggest approaching the seller on accomplishing some major repairs depending upon the other points of the transaction. Once all are received and approved and you are satisfied with the seller participation (if any), you can waive contingencies. Understand that once you waive, your contingencies you will have liquidated damages if you fail to close because you default. Generally, your liquidated damages amount will be equal to your deposit.

Close the escrow: The fun part! Now you own a building, congratulations!


  1. Thanks for the blog of Things That You Must Do. Since I’m not as well schooled on Facebook, I can’t find it this now. So would you please send that to me again.

    However, you left out one item that is especially important to you and other brokers. I hope I’m not being repetitive, but let me share a story with you:

    Team with us before the deal is made

    A client had bought a 2 story office building, and hired Gless Architects to design their corporate offices on the majority of the first floor. When we were brought into the project, we told them that there were major disabled accessibility issues to be resolved on the property. There was no way for a person in a wheelchair to get to the building from the sidewalk, without having to go up the driveway and risk getting hit. Even more surprisingly, there was no walk from the accessible parking stalls to the building. Thus a person in a wheelchair would have to go behind other cars, and risk being backed over. Both of these are violations of California state law.

    The result was that we had to design for removing landscape berms, installing over 200 lineal feet of retaining walls, and a longer amount of concrete walk, plus reworking the contour of a parking lot aisle. This work exploded their budget by an additional 40%.

    Had their broker brought us into the team before the deal, we could have backed him/her up, by telling them of the situation. They could have in turn advised the client on a negotiation strategy to either have the seller pay for the improvements, or lower the purchase price to absorb the potential costs.

    Let Gless Architects be your back-up early.

    Allen, I’d be happy to back you up as I have in the past. And, when you recommend an Architect / Interior Designer to clients, please forward my name.

    Let’s have lunch sometime.

    Aric D. Gless, A.I.A., LEED AP
    Gless Architects, Inc.
    Architecture – Interior Design
    4931 Birch Street, Newport Beach, CA
    949-852-0585 (o); 949-285-9834 (c )

    1. Thanks Aric! I believe a section in "due diligence" is appropriate.

      My best!

  2. Hi Allen:

    I especially liked today’s article for the following reasons:

    1. Specific recommendations for what to watch out for in the PSA – some very critical items to eliminate to protect your interests.
    2. The referral of trusted advisors to assist with the process – very valuable.


    Gregory W. Beck
    Certified Public Accountant