The term caveat emptor is not widely known among most real estate buyers and investors, but it is one of the most important and consequential legal principles of Commercial Real Estate transactions. Latin for “let the buyer beware,” it means that the buyer alone is responsible for verifying the quality and suitability of whatever they are purchasing. In other words, if the buyer fails to exercise due diligence on their Commercial Real Estate transaction – e.g., thoroughly investigate the subject property being purchased – any problems that emerge after the fact may be their burden to bear with little to no recourse.
Before entering into any real property transaction, learn the basics of due diligence and why you should contact Farshchian Law, P.A. to help you safeguard your Commercial Real Estate investment.
What Due Diligence for Commercial Real Estate Transactions Means
Due diligence can be understood in three simple words: “verify, verify, verify!” This means you must thoroughly investigate and understand every aspect of your transaction, from its end goal to the physical and legal conditions of the property itself. It also entails making sure you know what you want in this transaction – is it an income property or a commercial business space? Are you looking to invest or to occupy? This will determine what due diligence steps you need to take prior to committing to the purchase. In short, the point of due diligence is to avoid any potential risks and costs before it is too late.
When Should Due Diligence Begin?
Due diligence should start in the negotiations phase of the transaction – you can request a rent roll to run your numbers or determine whether a property can be used for a particular purpose before you even sign the contract. Once the contract is signed, you must complete your due diligence during the inspection period so that any improprieties or issues with the transaction can be uncovered and resolved, or so you can cancel the deal without legal or financial penalty.
For most commercial transactions, the minimum time period for due diligence should be 20-30 days, and the contract should also state that buyer can cancel, in his or her sole discretion, during the due diligence period if they are not satisfied with any item they uncover during the due diligence review. For larger commercial transactions that involve multiple tenants, zoning matters, or environmental studies, sixty days for due diligence may not be enough. It is important to speak who specializes in Commercial Real Estate transactions to determine what is an appropriate due diligence timeline for your particular transaction.
What Does Due Diligence Review Entail?
Due diligence should be as comprehensive as possible. While certain aspects of due diligence will vary depending on the nature of the purchase and what you intend to do with property, among the items due diligence should entail are the following:
- An environmental and physical inspection of the property to make sure it is in acceptable condition and matches what the seller has represented;
- A professional survey of the property to make sure there are no errors in the legal description, or unacceptable encumbrances or easements;
- A thorough review of the current leases, warranties, service contracts, landlord-paid expenses, and financial documents;
- A study to determine whether the property is in compliance with The Americans with Disabilities Act (ADA);
- A title search and examination that will uncover any issues with the title, such as a code enforcement liens, mortgages, a judgment against the seller, etc.;
- Verification that any applicable license, permits, and zoning regulations are in compliance; and
- Evidence that there are no taxes owed to any government authorities.
This list is by no means exhaustive, and your transaction may require many more steps and reviews. Meeting these requirements also means having to request and review dozens of documents, including copies of the leases, utility bills, the current title insurance policy, various property insurance policies (flood, hazard, liability, etc.), service contracts, licenses/permits, warranties, and perhaps other documents that are relevant to the transaction. Thirty days may not enough time to get this much done on your own, especially without the relevant background and experience.
How Farshchian Law Can Help With Your Commercial Real Estate Transactions
There is a lot at stake in your transaction, and much of it rides on your ability to carry out effective and thorough due diligence. Whether you are a business owner or an investor, you likely do not have the time, energy, or legal expertise needed to ensure that your due diligence is properly conducted. You cannot afford to make any mistakes, which is why Farshchian Law invites you to partner with us to make sure your interests are protected.
Our attorneys have the knowledge in business and real estate law you need to guide you through the due diligence process. We will help you with preparing and negotiating the purchase contract, forming a new corporate entity for the purchase, conducting a methodical title and lien search of the property, reviewing any lease agreements, and more. We can also handle all other matters pertaining to the closing of the transaction, such as holding escrow, preparing the closing documents, issuing title insurance, and handling the disbursement of funds.
When it comes to something as critical as due diligence, do not take any chances: call us at (800) 604-1871 or email us at Info@JFRealEstateLaw.com. We provide commercial real estate services throughout the State of Florida.