Commercial property provides owners with an income stream, with the quality of the income speaking to the value of the asset. A multi-user facility filled with credit-worthy tenants would command a premium compared to an empty structure.
If you’re a seller, you have to be prepared for a buyer to ask questions about the property. If you’re buying, an accurate lease abstract and rent roll will show the following:
Tenant’s name, suite number, size of premises. Rent, scheduled rental increases, percentage rent. Term commencement and expiration dates, options to extend. Options and rights of refusal to expand or contract the premises or to terminate the lease. Common area expense caps, pro rata share and base-year expenses. Security deposit with account tracing. All guarantors, any concessions made and obligations landlord must complete. A copy of all leases, including all exhibits, attachments, amendments, guarantees and subleases. Most recent financial statements and credit information for all tenants and guarantors. Current and historic payment reports for each tenant.
Forecast future income
In order to forecast future income, a buyer would want to review any executed letters of intent with prospective tenants, the most recent leasing status report, the owner’s standard lease agreement and operating information. A buyer would also want to review the last three years’ financial statements, and a year-to-date statement for the current year. They will also want to look at current operating and capital expense budgets for the property, including comparison of actual-to-budgeted results and an explanation of any variances.
Digging into the capital expenditures, a buyer will want to review all service, maintenance, leasing, management or other contracts, and all other agreements, warranties and guaranties relating to the operation, use, management or maintenance of the property. Knowledgeable buyers would also look for a report showing payment of all real estate tax bills, including special assessments, for the prior three years, along with utility bills, the owner’s insurance policies with insurer’s risk assessment, claims reports, copies of any claims under the building’s policies and a report showing the tenants retaining their insurance coverage.
Before purchasing a commercial building, a buyer will want to review a list of employees, including names, positions, wages and benefits. They would also want to see building information, plans and reports including the mechanical and HVAC systems, a qualified roof assessment, an environmental assessment including soils tests, radon, mold, lead paint and asbestos reports, as well as geotechnical soils reports, seismic risk assessment and plans showing the “as built” condition of the property.
Additional review required
Additional review includes compliance with Americans with Disabilities Act (ADA) requirements architect’s certificate or studies certifying the square footage of the building. All licenses, permits and approvals for the property, including, without limitation, certificates of occupancy for the building and for each tenant would be wanted as well as a recent boundary and/or title survey, seller’s policy of title insurance for the property, a copy of existing loan documents if the loan(s) are being assumed. The buyer would also want copies of any notices of violations of or verifications of compliance with any federal, state, municipal or other health, fire, building, zoning, safety, environmental protection or other applicable codes, laws, rules, regulations or ordinances relating or applying to the property.
Plan to be able to provide a buyer a list of all pending and historic litigation against the property, the seller or any general partner of the seller that relates to the property. For larger properties, information about trademarks, brochures and websites if such intellectual property would be transferred should also be included. A list of all furniture, fixtures, equipment and supplies attached, located in or used in connection with the operation of the property that will be conveyed in the sale should be listed.
With a handle on a building and its operations, a prospective buyer can make an informed decision regarding its purchase.