What Reports Are Necessary For A Building Purchase

Generally speaking, once a buyer and seller agree upon a price and terms of a purchase transaction, these points are memorialized in a purchase and sale agreement. Purchase and sale agreements come in several flavors—the most common of which are standard and proprietary. The AIR CRE contract, a widely used iteration, and the CAR commercial contract are examples of standard forms. Proprietary contracts morph the seller’s spin on certain things such as warranties and representations. In my experience, standard forms are common for deals less than $10,000,000, while seller forms dominate for transactions above this amount.

Now, let’s assume the deal is in its infancy with a signed contract. As the buyer, you’ll want to review and engage certain consultants for “third-party reports.” Some sellers remove the mystery and provide the buyer with a complete complement of reports. In other deals, the onus is upon the buyer to create a due diligence package.

So let’s dive into the typical studies necessary for a thorough review of the considered property:

Title Report

A title report ensures the property is free from legal encumbrances, such as liens or easements, that could affect ownership or usage. Reviewing the title report is vital for verifying that the seller holds clear ownership and that there are no surprises when it comes to boundary issues or legal rights tied to the property.

Appraisal Report

An independent appraisal confirms that the agreed purchase price aligns with the property's market value. This report is essential not only for your financial analysis but also as a requirement from lenders to justify the loan amount.

Environmental Report

This typically starts with a Phase I Environmental Site Assessment, which screens for historical or current environmental liabilities. Should any concerns arise, a Phase II assessment, involving deeper testing, may be necessary. An environmental report is crucial for identifying any contamination risks that could lead to costly remediation or regulatory complications.

Building Inspection

A property condition report or detailed building inspection assesses the state of the structure and major systems, such as the roof, HVAC, plumbing, and electrical. This report helps you anticipate maintenance or repair needs and budget accordingly.

Zoning Report

Zoning reports confirm whether the property’s use complies with local regulations. This is key for understanding current and potential future use, and whether any zoning changes or variances are necessary.

ADA Compliance Report

If the property is accessible to the public, ensuring compliance with the Americans with Disabilities Act (ADA) is critical. This report identifies any upgrades needed to meet accessibility standards, helping you avoid legal liabilities and costly retrofits down the line.

Financial Review

For properties with tenants or a history of income, a financial audit reviews current rent rolls, tenant payment history, and lease terms. This allows you to assess the stability and profitability of existing income streams and spot any potential issues.

Seismic Report

In areas prone to earthquakes, a seismic assessment evaluates the property’s structural resilience and identifies potential retrofitting needs. This report can inform insurance requirements and future safety investments.

Natural Hazards Disclosure

A natural hazards report identifies whether the property lies in a flood zone, wildfire risk area, or other hazard-prone location. Understanding these risks can impact insurance costs and property management strategies.

Property Information Sheet

A comprehensive summary sheet consolidates vital details about the building’s specifications, such as square footage, year built, and major renovations. This document provides a snapshot for reference throughout the transaction process.

Mandatory Disclosure Form

This form, often required by law, includes any known defects or issues the seller is aware of, adding a layer of transparency to the deal. Reviewing it can highlight potential red flags or areas for further investigation.

Completing a thorough review using these reports can help you make informed decisions, mitigate risks, and ensure that your building purchase aligns with your expectations and strategic goals.?

Allen C. Buchanan, SIOR,?is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at?[email protected]?or 714.564.7104. His website is?allencbuchanan.blogspot.com