Due diligence, sound advice needed before closing the deal
Ron Frederiksen
RSV Construction Services
Buying an existing commercial building is serious business. Unlike purchasing a home, where only a quick inspection of any needed repairs may be necessary, a commercial building requires a highly focused and detailed feasibility study.
The problem is that many commercial general contractors don’t want to spend the time and money required to determine if a specific building is a good investment, and most residential general contractors don’t know their way around the commercial world.
Part of the reason lies in the complexity of zoning and planning laws. A particular zone designation doesn’t mean a building can be used for all commercial uses in that zone. Merely converting from a general office to a dental office, for example, represents a change of use and may not be permissible. It depends on available parking, transportation capacity, utility availability and other issues.
Research into these zoning and planning laws must be done in a very specific way to ensure that the information is gathered in a formal written format from the specific building authorities. Otherwise, everything is just talk, and could come back to haunt you in the future.
If you need to remodel the building after purchase, it is important to assemble an accurate, bottom-line budget, including all “soft” costs such as sales tax, design, engineering and all permits and fees. It is important that you select and commit to a general contractor and have them work with the design team, prepare preliminary drawings and base their budget on those drawings. Make it clear you will insist that – if you decide to purchase the property – they must deliver the intended project for the budgeted cost.
When assembling the remodeling budget, the contractor must bring in skilled subcontractors not only to assemble a budget, but to examine the condition of the property from each subcontractor’s unique perspective.
For example, mold and mildew are huge problems which a contractor’s liability insurance typically excludes. A structure can be infested with mold from a variety of sources – for example, leaking plumbing, heating and cooling drain lines, leaking exterior siding or roofing or defective sheet metal flashings. Each of the trades will be able to look at this one issue from their perspective and advise on any problems.
Timing of the actual closing is critical. Your selected contractor and design team can specify the time required to design and permit your remodeling project. It is highly advisable not to close until you have all permits in hand. This is the most conservative approach and isn’t what the seller wants, but consider an actual “war story.”
Building “A” was under a 90-day closing timeline to allow the purchaser time to perform their due diligence. They retained a residential contractor, who had drawings prepared by a residential designer. When they assembled their budget, it was more than $300,000 over what could be invested in the building. No consideration was given to planning and zoning laws. The local building authority was never even contacted. Assumptions were made based only on the uses and renovation of adjoining properties. These assumptions may not have been accurate.
What was most problematic was that they had not carefully examined the condition of the building. Mold and mildew were everywhere to the extent that mushrooms were growing out of the brick chimney on the inside of the building. We advised that the purchaser terminate their agreement with the seller. They agreed. However, by the time they called us, they had less than 10 days before they were closing on the purchase.
The lesson is to take nothing for granted before you purchase an existing commercial building. Exercise your due diligence and seek out informed advice well in advance of closing, so unseen problems do not become YOUR problem.
Ron Frederiksen is president of RSV Construction Services Inc., a Vancouver commercial and industrial design-build and remodeling firm. He can be reached at 360-693-8830.
