Commercial real estate is a fast moving and oftentimes complex industry, and you may feel like you’re in over your head if you’re not familiar with some of the processes and terms you’ll encounter during the course of your commercial real estate transaction. To ensure the process runs smoothly, we’re going to use today’s blog to define five common terms you may encounter in your purchase agreement as you move towards a commercial real estate acquisition.
Five Commercial Real Estate Terms To Know
Let’s break down five terms you may run into leading up to or during the purchase of a commercial property so that you understand everything in your purchase agreement.
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Due Diligence Period - The due diligence period is an incredibly important aspect of the purchasing process from the buyer’s perspective. Due diligence is a set period where the purchaser will thoroughly examine a property prior to closing in order to closely assess the physical and financial condition of the property. Some assessments and inspections that are typically performed during the due diligence period include:
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Building Assessment
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Environmental Report
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Title Search
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Property Survey
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Expenditures Report (Utility bills, taxes, maintenance, repairs, etc.)
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All of these reports help a purchaser truly understand the condition of the property they are considering acquiring. Due diligence is a set period of time, and if these assessments are not performed within that timeframe, it’s possible that the buyer may miss some critical issues with the property that will soon become their problem.
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Easement - We’ve talked about easements at length on this blog, but essentially an easement is an agreement between two parties that outlines how a non-property owner can access the land. Business owners at a commercial district may have an easement arrangement in regards to how shipping orders are delivered through a shared driveway, or the government may have an easement for accessing utility lines on your property. You always want to make sure that a title clearing company identifies any easements on a property prior to acquisition, because you can’t just get rid of a standing easement simply because you’re the new property owner.
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Encroachment - Encroachment is a term you may have heard on the football field, but it’s also a term that may come up in your commercial real estate acquisition. An encroachment is when part of your property encroaches onto your neighbor’s property without their permission. A mislaid fence or overgrown foliage could be considered encroachments, and it’s important to thoroughly understand your prospective property lines and any potential encroachment issues prior to purchasing a property so there isn’t a dispute later on.
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Encumbrance - An encumbrance is a blanket term that covers a variety of claims made on someone’s property other than the title holder. For example, both an easement and an encroachment would be considered an encumbrance. Mortgages and liens are also considered a form of encumbrance. As a prospective buyer, it’s helpful to understand any and all outstanding encumbrances so that someone else isn’t claiming rights to your property after you’ve acquired it.
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Title Search - Finally, one term that you’ll become familiar with if you connect with the team at Commercial Partners to assist with your commercial real estate transaction is a title search. The title search is the process by which public records are reviewed to thoroughly understand legal ownership or claims to a property. We perform title searches on a daily basis to uncover encumbrances, title defects or judgments related to a property so that you know if you’re buying a clean title. It’s important to resolve any potential title defects or at least factor them into the negotiation process well before you close on a property.
For more information about any of these terms, or for help with any aspect of the commercial real estate acquisition process, reach out to the team at Commercial Partners today at (612) 337-2470.