This article discusses important dates and checklists regarding the purchasing of commercial real estate in Wisconsin.
Important Dates:
1. The Effective Date of the Purchase and Sale Agreement
2. Escrow Period
3. Estimated Escrow Closing Date
4. Period of due diligence/investigation by the buyer
5. Non-Refundable Earnest Money Deposit Date
Checklist for Purchasing Commercial Real Estate:
Purchase and Sale Agreement
In a commercial real estate transaction, the PSA is rarely a standardized document with consistent "key dates." Make sure to read the document thoroughly to ensure that the agreement's terms are met or waived in a timely manner.
Acknowledgements
Many of the consumer protections afforded to a buyer in a residential real estate transaction are not available to a buyer in a commercial real estate transaction. It's a common misconception that seller disclosures are required. Examine the PSA to ensure that all of the agreed-upon disclosures have been made. However, the majority of PSAs will include a list of seller-mandated disclosures.
Report on the Preliminary Title
Once escrow has been opened, a preliminary title report is usually ordered. It contains information about the property, such as how title is currently held and what types of title exceptions are currently on file (for example, easements, liens, and encumbrances). The preliminary title report then becomes the final title report, which is used to determine whether or not title insurance is required.
Zoning Requirements
Confirm that the current or proposed use is permitted by local zoning regulations. A non-conforming use can have serious ramifications. Consult a land use attorney in your area.
Disclosure of Natural Hazards
The Natural Hazard Disclosure will show if the property is in a special flood hazard area, a dam failure inundation area, an earthquake fault zone, a seismic hazard zone, a high fire severity area, or a wildfire area. If the property is in a Natural Hazard Zone, it may be necessary to purchase very expensive insurance.
Investigation of the Environment
You expose yourself to potential environmental liability by taking title to the property, regardless of fault. However, an "innocent purchaser" may have some legal protection if they conduct a thorough investigation of the property. A Buyer should conduct a “Phase I” investigation and, if necessary, a “Phase II” investigation. Private companies conduct these investigations.
Survey of Hazardous Materials
Employ a local environmental engineering/inspection firm to inspect the structure for hazardous materials such as asbestos, lead, and PCBs. Remediation of hazardous materials can be expensive. Inspection and supervision fees, as well as disposal fees, may be included in the cost.
Physical Examination of the Building
A visual examination of the structure and building systems is performed during a building physical inspection. Before making a final purchase, you should have the building thoroughly inspected by a professional inspector who is both experienced and impartial.
Surveys
For most real estate transactions, the ALTA survey is the standard. In most cases, the title policy will cover issues that were not discovered during the ALTA survey. A survey should reveal any issues with property lines, easements, or setbacks.
Septic and Wells
Problems with wells and septic systems can be costly. Consider having the well or septic system on the property inspected by a local company.
Termites
A termite inspection can be ordered from a local pest control company. The report will usually be divided into two sections. Section 1 will cover current conditions, while Section 2 will cover issues that could lead to future problems.
Utility services
Determine which utilities provide service to the property. Water, sewage, gas, electricity, cable, and telephone are all available.
Appraisal Value
A private appraiser is hired to determine the property's fair market value. Choose a private appraiser who will be accepted by the lender.
FIRPTA
The buyer must ensure that the seller is not a foreign individual or company. If the seller is a foreign national, the buyer is required to withhold tax proceeds from the sale and is liable for the amount withheld if they fail to do so. In most cases, the buyer can rely on the seller's FIRPTA affidavit.
Bill of Sale
The bill of sale is the legal document that proves the transfer of personal property from the seller to the buyer.
UCC Lookup
If any personal property is involved in the transaction, the Secretary of State's UCC search should reveal any encumbrances on that property.
Property and Liability Insurance
Get property and liability insurance from your insurance broker. Typically, the lender will insist on both being kept up to date throughout the loan term.
Closing Statement
The closing statement is a detailed accounting of all costs and funds exchanged between the buyer and seller.
At the close of escrow, any agreements assigned to the buyer or terminated will be assigned to the buyer.
Existing service agreements for janitorial, security, and maintenance will apply to most commercial buildings. These service agreements can be transferred to the buyer or cancelled. Regardless, you should be aware of any and all property-related agreements.
Certificates of Tenant Estoppel
The certificates are obtained from current tenants to verify that the lease terms are being followed and that there are no active defaults.
Checklist for Construction and Renovations:
Budget for Construction
Creating a construction budget is critical for determining the loan amount needed to complete the project. Both the design and construction costs should be included in the budget.
Architect
Set a fixed price for the design of the building or renovations.
General Contractor
Set a fixed price for renovations and confirm that the building can be completed within the loan limits.
Plans & Specifications for Construction
Examine the construction drawings to ensure that the design and materials are in line with the project's goals.
Permits for Construction
Ensure that all government regulations are followed.
Substantial Completion Certificate
Confirm that the structure was built according to the plans and specifications.
Occupation Certificate
The building inspector certifies that the structure is up to code and may be occupied.
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