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The Commercial Real Estate Buyer’s Checklist

The Commercial Real Estate Buyer’s Checklist

When buying commercial property California, even the most experienced property investors will have a checklist on hand in order to speed up the process and avoid the common pitfalls of such a high stakes transaction.

Whether you’re new to commercial real estate or a seasoned investor, having a buying commercial real estate checklist on hand can only be beneficial.

This checklist ought to cover the following aspects of the transaction:

Buyer representation

In California, brokers may only operate if they hold a valid real estate broker license, which can only be obtained after accumulating two years of professional experience as real estate salesperson under the strict supervision of a licensed broker.

The R&Z Group of Marcus & Millichap has 10+ years experience in real estate representing buyers and sellers of commercial property.

Buyer representation is a key component to negotiating a deal accordingly and making sure you end up with the best terms and pricing possible.

Having the right agents representing you on the acquisition of a property can help mitigate many risks. Although all due diligence is the responsibility of the buyer or their legal representation, a good agent can help you spot obstacles or issues with their prior experience and key understanding of a certain market.

Your broker should meet the following criteria:

  • They should demonstrate knowledge and expertise in the property type and location you’re interested in.
  • They should demonstrate problem solving and identify solutions for potential problems before they occur
    • i.e. Are the rents high because concessions were offered? Does this are general see more turnover than others because of factors like employment or student housing? How can you add value to the property through items such as renovations, tenant benefits or rent increases? Does the property have any underlying financial issues you are not aware of such as liens on the property (through a title report) or are there addition special tax assessments that great effect your tax bill?
  • They should have a verifiable history of successful commercial real estate transactions and referrals if needed for verification

When speaking with a broker, ask them the following questions:

  • What’s their experience with your property investment and commercial real estate goals? If you’ve done your research, you’ll already have an idea of the broker’s specializations – however, a face-to-face consultation will help you make sure that they truly live up to their qualifications. Discuss your reasons for leasing commercial real estate and ask them how they plan to assist you.
  • What is the size of the brokerage? In many cases, you’ll have to choose between a larger and more established brokerage, and a boutique brokerage. A large brokerage has the resources and reputation to follow through with a complex transaction, while a smaller one might offer more personalized service.
  • How are they compensated for their services? Brokers usually get commissions and are not salaried – the longer the lease and the sooner it gets signed, the better. However, large, established firms often put brokers on a partial salary to lessen their dependence on commissions and therefore prevent a conflict of interest.

Due diligence

This part of the buying process is meant to make you fully aware of the condition of the commercial property, including the land and any structure located on top of it. Practicing due diligence will help you uncover potential issues with the property.

Since no two transactions are the same, with differing property features, buyer objectives, and lender requirements, the due diligence process varies with each commercial purchase. The R&Z Group of Marcus & Millichap has access to numerous third-party property inspectors to help buyers and sellers conduct their due diligence with detailed property inspection reports that are provided

To initiate the due diligence process, you must:

  • Determine the scope of due diligence, including the length, budget, and kind of physical inspections needed
  • Send a due diligence list to the seller (The R&Z Group of Marcus & Millichap has a recommended list to provide for all clients if needed)
  • Set appointments with the seller to receive all pertinent documents

The Purchase and Sale Agreement (PSA) will require the seller to give you copies of all the documents relevant to the sale and ownership of the property, including:

  • On-going leases
  • Operating statements
  • Previous Phase I reports
  •  American Land Title Association (ALTA) surveys
  • Applicable warranties
  • List of Recent Upgrades or Capital Improvements

Aside from reviewing the documents provided by seller, you also have to perform an independent investigation of the commercial property. From your end, you must complete the following documents and tasks:

  • Environmental site assessment (Phase 1)
  • Physical inspections of the property (i.e. evaluation of HVAC and other interior systems, ADA compliance issues, etc.)
  • ALTA survey
  • ALTA title insurance policy
  • Zoning letter
  • Appraisal

It’s crucial to start the due diligence process as soon as possible to prevent delays in the transaction. As all this may seem like a lot of information to gather the benefit of having a qualified team and agent representing you like the R&Z Group of Marcus & Millichap is that these items can be handled by our transaction coordinators and although all documents must be approved by the buyer or their legal representation having a structured due diligence folder and an organized process for handling the escrow timeline is extremely beneficial for making key decisions throughout the process.

Financing

The R&Z Group of Marcus & Millichap has access to numerous financing options through Marcus & Millichap capital corporation to secure financing for commercial real estate, you must gather important financial records, including:

  • Financial statements
  • Rent rolls
  • Appraisals
  • Budgets
  • Tax bills
  • Tax returns
  • Assessment notes

Paperwork

As with any real estate transaction, purchasing commercial real estate entails a great deal of paperwork. Some of the most important documents include:

Brokerage agreement. This document will contain the terms of your arrangement with the broker. It should state who is expected to perform which tasks, how the broker will be paid, what expenses will be incurred during the transaction, and so on. It also covers indemnification, which covers the extent to which you or the broker will be and not be held responsible for the other’s actions.

Letter of intent (LOI). Although non-binding, the LOI is often the starting point for negotiations. This document reflects your position and helps you determine if you and the seller see eye to eye on the basic terms of the deal.

The PSA, another vital document, is often based on the LOI. Working with a commercial real estate agent will help you draft a clear and persuasive LOI to move the process along. If you and the seller agree on the basic terms of the LOI, you can start drafting the full PSA.

Purchase and sale agreement (PSA). Perhaps most important document in the transaction, the PSA covers the following details:

  • The manner in which funds and documents will change hands between buyer and seller
  • The timeline that the buyer must follow to review the documents and have the property inspected
  • The timeline for closing
  • Representations and warranties of each party
  • Covenants the parties agree to perform;
  • Provisions in case the buyer defaults on the purchase
  • Miscellaneous provisions and issues

Ready to buy commercial real estate in California? Let The R&Z Group of Marcus & Millichap be your guide. You can get in touch with us here or at 650.391.1758 and 650.391.1781.

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