Gavel to Gavel: Know what you're buying

Journal Record
Feb. 8, 2012

It goes without saying that caveat emptor is the first thing buyers of real estate should have on their due diligence checklist. This is true even when all the best intentions of the parties to an acquisition transaction are on the up-and-up. More importantly, real estate buyers need to be mindful of the fact that there can be gaps in the advice of various real estate due diligence professionals like attorneys, title companies, surveyors, appraisers and environmental consultants. It’s what I call the coordination glitch.

There are two types of commercial real estate buyers. The first one deals in real estate as a business. The second group gets involved because it needs bricks and mortar for a core business that is not directly real-estate related. The former group tends not to have a high incidence of this type of mistake, while the latter does. Here’s an example. A sophisticated business owner goes out to add yet another satellite location for his rapidly expanding professional support services company. Everyone is lined up for the due diligence protocols, and the mortgage lender is on board. The targeted site is in a well-established urban area, so the potential for surprises should be low.

The title commitment, survey, appraisal, etc., are all done timely and professionally. The acquisition and expansion loan gets approved, and the buyer is off to closing, which is smooth and uneventful. A few days later, the other shoe drops. What the buyer (and seller for that matter), thought was the property line is actually several feet short of where it needs to be to provide enough space for adequate parking according to code for the buyer’s anticipated expansion. The buyer can’t start its construction, and the bank has loaned on the basis of an upgraded facility as collateral, which it won’t have. It becomes clear that the buyer thought somebody else had the responsibility for catching this.

There was simply a breakdown in connecting the dots. The lender and buyer knew about the expansion plans, but nobody else really had a need to for their due diligence responsibilities. The consequences were significant.

Hire qualified and experienced real estate professionals, but remember, ultimately, a buyer needs to have an overall view of a project’s components and goals.

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