Want to Own Your Building? Important Matters To Consider when Purchasing Commercial Property

Editor's Note: Clint D. Routson is a member of the Real Estate Section of Ward and Smith, P.A.

This is the first of a two-part article intended to help business owners focus on important issues in property transactions that sometimes get limited consideration due to the attention being focused on price and other general business considerations. This article focuses on issues related to the land; Part 2 will focus on the building. As the article is short and general in nature, it touches only some of the matters to consider in commercial property transactions. It is intended to give you a starting "checklist" of non-financial issues to consider and to assist you in working with your attorney to prepare a specific list for your purchase.

Zoning and Similar Requirements

What is the zoning of the property and is your intended use of the property permitted under the zoning? Past use does not equate to permitted use. Make certain that your specific proposed use does not have any special conditions or requirements in addition to the general requirements. Does the property have the required amount of parking? Are there landscaping requirements? Do buildings on the property meet all setback requirements? While certain requirements may not prevent you from opening your business initially, they may prevent you from making any modifications or additions to the building in the future.

Other Property Restrictions or Reservations

Private restrictions in the chain of title may prevent you from using the property as you planned, even if zoning regulations would permit the use. Private restrictions may impose various obligations on you and the property, such as the obligation to pay assessments, to construct buildings adhering to a certain architectural style or standard, or to give a third party a right to purchase the property if you sell. All of these could affect your present and future plans for the property and the market and price available to you when you decide to sell. The list of potential restrictions almost is limitless. You should read any restrictions or reservations that affect the property very closely.

Boundaries

The property should be surveyed to confirm the property lines, property corners, location of improvements on the property, setback requirements, and the location of all easements affecting the property. While a lender may not require a survey, that does not mean you should not get one to protect your interest. There are different types of surveys, and, generally, the more you pay, the more you get. All surveys should disclose if any of a neighbor's improvements encroach upon the property to be purchased, and if any of that property's improvements encroach upon a neighbor's property. Normally, you also will want to have the surveyor look for signs of other uses on the property (such as manholes or aboveground utility boxes that could indicate that underground utility lines cross the property). Another important issue for the surveyor is to make a determination of whether the property is in a flood zone and, if applicable, of the building elevation information required to be submitted when you apply for flood insurance.

Title

The title to the property should be examined by a real estate attorney. The title examination will look for answers to such questions as: Does the seller have "good" title to the property to convey to you? Were the prior deeds in the chain of title signed by the proper persons, notarized, and recorded? Was the property properly described in the prior deeds? Are there any other errors or problems with the documents in the chain of title? Are there any recorded easements that burden the property and represent rights that other parties have in the property or that benefit the property and represent rights the property owner has in other property? Do easements that burden the property adversely impact the value of the property or your intended use of the property? Do easements that benefit the property permit the type and extent of use needed for your proposed use of the property and have those easements been established properly? Do the easements discovered in the title examination compare to the easements located on the ground by the surveyor? Are there any liens recorded against the property including mortgages, judgment liens, mechanics' liens, or tax liens?

It also is important that you purchase an owner's policy of title insurance at the same time as the property purchase. This is different from the property or liability insurance you may buy, and provides you with compensation should a defect in the title later be determined.

Access

Does the property have adequate access to a public right of way? Will you be able to obtain any required permits to make any modifications to the access? Will the state or local municipal authority require you to conduct a traffic study, build a turning lane, and/or make other traffic improvements on or off of the property before granting you the access you want or need? If you are accessing the property through another's property (such as in a shopping center, in an office complex, or down a private road), do you have legal access rights over the necessary areas or private road to access the property? If the private access road crosses a railroad track, special care should be taken to confirm what, if any, legal rights exist to cross the railroad track.

Water and Sewer

What type of sewage system serves the property? Is it an on site septic tank system, community sewer system, or municipal sewer system? What is the capacity of the system and will it accept any special "sewage" your business generates? Will your proposed use require the installation of any particular improvements to the system, such as an oil and water separator? The capacity and/or type of sewage system may limit your ability to use the property.

Is the property served by a municipal water system, a community water system, or a private well? If a private well, will the well support the amount of water your business will require at all times? If the water is not from a system that is tested regularly, has the water been checked for contaminants?

Stormwater Discharge

The restrictions on the discharge of stormwater from developed property seem to increase daily. If the property has an existing stormwater retention/detention system, was it built pursuant to state standards and permits and has it been maintained as required? If the property does not contain a stormwater system, where is the stormwater presently going? If the stormwater is going to an off-site retention/detention pond, does the property have appropriate easement rights to get the stormwater from the property to the pond and to place the stormwater in the pond? Will you be required to install a stormwater system on the property if you make any improvements to the property?

Environmental

Be certain to have a current All Appropriate Inquiry ("AAI") environmental examination conducted on the property prior to your purchase. While still commonly referred to as a "Phase 1" inspection, the new AAI rules have specific and updated requirements. Failure to have this inspection performed in compliance with the new AAI requirements prior to your purchase could expose you to unlimited liability due to environmental contamination on the property that occurred prior to your ownership. The AAI examination attempts to uncover information of any past contamination and any prior uses of the property or surrounding properties that involve environmental contaminants that could impact the property. If the AAI is not "clean," generally additional investigation and testing, commonly referred to as a "Phase II" investigation, will be required.

Taxes

Finally, it is important to know the amount of the property taxes assessed against the property. Are there any special assessments against the property for such things as sidewalks, street improvements, utilities, or drainage districts? If the property is not presently in a city or town, you may want to investigate whether there are any current plans for annexation of the property by an adjoining city or town. Annexation may affect both the use and taxation of property.

Closing Thoughts

In most real estate transactions, if you make an offer to purchase in writing and the seller accepts your offer, then you will be bound by the terms in your offer. If you have failed to include a term or condition in your offer that is important to protect your interests, you may be out of luck and stuck. Consequently, it is important to consider all the above issues – and more – before you make the offer. A real estate attorney can assist you in determining what should be included in the offer, but, after the fact, an attorney can explain only the problems with the offer and your options with respect to getting out of or breaching the agreement. The general maxim that it is more expensive to cure a problem than it is to avoid one is true in property transactions.

© Ward and Smith, P.A., 2008

Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. Clint D. Routson practices in the Real Estate Section, where he concentrates his practice on commercial real estate issues. Comments or questions may be sent to cdr@wardandsmith.com.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.