15 Questions to Ask Before Buying a Commercial Property

15 Questions to Ask Before Buying a Commercial Property

Whether you’re a first-time buyer or an experienced investor, every prospective commercial real estate (CRE) transaction requires due diligence.

While there’s no one-size-fits-all blueprint for success, we’ve compiled this list of 15 questions that you can use as a starting point to guide your initial research and discussions. Asking these questions can help you uncover potential problems, assess the property’s financial viability and ultimately ensure that your investment aligns with your business objectives.

1. What is the local CRE market like?
Knowledge of the local CRE market is crucial for making a sound investment decision. Buyers should be aware of other development projects planned for the area, as these could influence future property values and demand. Also, the historical occupancy rate for the property provides insight into its appeal to potential tenants. A high occupancy rate indicates a desirable location, while a low one might signal potential issues.

2. Why is the property being sold?
Understanding the motivation behind the sale can reveal valuable insights about the property. For example, the owner might be selling because of financial trouble, issues with the property, changes in the market conditions or personal reasons. This information can inform the buyer about potential problems or negotiation opportunities.

3. What’s the property assessed at?
The property’s assessed value provides not only an estimate of its worth for taxation purposes, but potentially also a baseline for negotiations, information about potential future property tax liabilities and a sense of how the property’s value compares to others in the area. However, it’s important to note that assessed value can differ from market value, and a full appraisal or market analysis may also be necessary.

4. Does the survey match the described property lines?
Confirming that the property’s physical boundaries match those described in the legal documentation can prevent potential disputes with neighboring property owners and ensure that the buyer is getting exactly what they’re paying for. Discrepancies between the survey and the property description could signal encroachments or easements that could impact the property’s value or use.

5. Does the zoning code allow for my proposed use?
Zoning codes dictate how a property can be used and can impact the building’s maximum occupancy, as well as possibilities for future expansion or modifications. This information is key because even if a property is ideal in all other respects, if it is not zoned appropriately for your intended use, you might face significant legal hurdles or penalties or be unable to use the property as planned.

6. Can I see a pro forma?
A pro forma is a financial statement that shows a property’s current and projected income and expenses, as well as details about tenants and a rent roll if applicable. Examining a pro forma can be helpful in forecasting the financial performance of a property over a specific time period.

7. Are allowances or tax abatements available?
Tax abatements and allowances can significantly impact the financial feasibility of a commercial real estate investment. These incentives can lower the property’s effective cost, increase profitability or make an otherwise unfeasible project feasible. Understanding what benefits might be available can be a crucial part of evaluating a property’s potential return on investment.

8. Is the title clear?
A clear title confirms that the seller has the legal right to sell the property and that there are no outstanding liens, encumbrances or disputes that could hinder the sale. If there are issues with the title, the buyer may have trouble securing financing, face legal disputes or may even lose ownership of the property.

9. Are there expired permits, unsatisfied obligations, unpaid liens or other legal liabilities?
Discovering any of these issues after purchase could lead to substantial financial liability or even legal disputes. Due diligence regarding any potential legal or financial obligations attached to the property will help ensure that you’re making a fully informed investment decision and are not surprised by any hidden costs.

10. Are there any major issues with the building?
Assessing the physical condition of the building, including the foundation, drainage system and HVAC, is crucial to avoid unexpected repair or maintenance costs. An inspection should reveal a problematic foundation, poor drainage or an outdated HVAC system, any of which could require extensive repair work and affect the profitability of the investment.

11. Is the property in a flood, seismic or high-wind zone?
Properties located in areas prone to natural disasters like floods, earthquakes or high winds may require additional insurance coverage, construction modifications or preventive measures. Such factors could increase the cost of ownership and potentially impact the property’s value and desirability for tenants.

12. Is the property up to code?
Verifying whether a property meets all local building and safety codes, including Americans with Disabilities Act (ADA) guidelines, is essential to avoiding any legal and financial troubles down the line. If the building is not up to code, the buyer could face significant expenses to make necessary upgrades or modifications, potentially affecting profitability.

13. What utilities are available?
Understanding what utilities are available will impact the types of businesses that can operate in the building. It also has a direct effect on operating costs. If the property lacks certain utilities or if the existing infrastructure is outdated, you may need to budget for additional investments to install or upgrade these services.

14. How much parking space is available?
The availability of parking can greatly influence the attractiveness of a property to potential tenants or customers, especially in commercial real estate in urban areas. Depending on your intended use for the property, inadequate parking could limit the types of tenants or businesses that the property can accommodate, potentially affecting its profitability.

15. What fixtures are included in the sale?
Clarity about which fixtures are included in the sale is important because it can impact the property’s value and the cost of getting the property ready for use. Disputes over fixtures can lead to unexpected costs if the buyer has to replace items they assumed were included.

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For more information and personalized advice, contact S&T Bank.