ALP: I want to purchase a commercial property for investment. What issues need to be addressed in the contract, and what inspections should I undertake?

December 2005

Make sure the contract provides an inspection period (typically 30-60 days).  During this period, you will want the right to conduct inspections (see below) and terminate the contract and recover your earnest money if the results are not satisfactory.  Also, make sure there is a contingency allowing you sufficient time to obtain financing (or to terminate the contract if you are unable to).

You should plan on having the following inspections done at a minimum.  Obtain an environmental assessment of the property.  You might also need to obtain additional tests for the presence and/or condition of asbestos-containing materials, lead-based paint, mold or radon.  Obtain a title commitment and current survey of the property, and make sure there are no issues affecting your ability to sell the property in the future or use the property as intended.  Have the building inspected for structural soundness and deferred maintenance issues.  Determine the property’s zoning classification and what development restrictions apply (such as setbacks, height limitations and the like).  Get complete copies of all tenant leases.   Make sure that the business terms of the leases (rent, pass-through charges, term, renewal rights) are consistent with your understanding.  Also, unusual lease terms such as early termination rights, rent abatement clauses and other terms could impact your ability to obtain a loan.

As you proceed to closing, consider forming a limited liability company or other entity to own the property.  This can provide liability protection as well as confidentiality, and facilitate transfer of ownership interests to family members.

A real estate attorney can help you negotiate the contract, select qualified professionals to assist in the inspection process, and coordinate review of their work.

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