Buying Commercial Property? Take Property Inspections Seriously
Everybody who has ever bought a house knows that the property inspection is a crucial part of the purchase process. The property inspector tells the buyer whether the house is in good condition or if repairs are necessary. If nothing else, buyers pay close attention to the roof inspection. A defective roof will derail any transaction. In nearly every residential transaction, buyers and sellers will negotiate some credit for repairs that have been disclosed in the property inspection, even if the contract was “As Is.”
The same can’t be said with commercial deals, at least until earlier this year. In the past, the majority of commercial property transactions were “As Is” and most buyers did little physical inspection of the property other than environmental surveys, relying on seller maintenance reports and operating plans for future capital expenditures. Contracts contain seller representations and warranties (as detailed as sellers are willing to give) but buyers have always planned for maintenance and replacement reserves up to the amount sellers already budgeted for. If smart, buyers plan for higher reserves.
Commercial property inspectors provide good reports for budgeting for short term and long term maintenance. A commercial buyer who isn’t using either a property inspector or a full structural engineer on an older building today is committing gross negligence. We know that structures nearing or past the 40-year certification in Miami-Dade and Broward County should be thoroughly inspected down to the rebar. This is good practice everywhere.
A buyer should carefully review all inspection reports to determine whether additional inspections are necessary. Commercial property inspectors are, in essence, “jacks of all trades” and are not necessarily experts in any one or all areas of building construction. They are tasked with finding areas of potential problems, but not the actual problems. Therefore, if an inspector notes that they “observed” water staining on ceiling tiles or air blistering on the roof, or both, it would be a good idea to retain a roofing contractor or engineer to further inspect the roof.
The inspection report is a map for the buyer to uncover potential issues. It should be relied on, but not become the be all, end all. It should help a buyer find areas of concern that should be further investigated. And it should guide the buyer in preparing proforma financial statements as to short-term and long-term capital expenditures. In that way, the buyer can make an informed decision, hopefully prior to the end of the contract due diligence period, whether to proceed with the transaction, or to terminate.