What to do after offer is accepted on a industrial warehouse?

Question

It's my first time buying an industrial warehouse in Southern California. Now the offer is accepted. We have one month to remove non-financial contingencies, and then another half month to remove the  mortgage contingency, and then another half month for closing. So if everything works out fine, we will close in two months.

My questions is what should I do in the next two months? My agent told me the mortgage lender will do all the inspections (physical, phase I environmental, hazardous, soil, governmental approvals, title, survey, lien, etc.)  Sounds like I can just sit there waiting to hear from the lender whether it passes all the inspections, and whether we finally get his approval on mortgage.

Is that right? I think there should be some due diligence on my part. So could anyone give me a step-by-step instruction on what to do between offer acceptance and closing? Or let me know where I can find this information. Thanks a lot.

Joel Owens · Answer

One tip is when you set the due diligence phase have  a clause in the contract that due diligence starts once ALL items listed in the PSA contract are given to buyer.

Some sellers are just lazy with getting things together or intentionally are hiding something and wait until the last few days or week in due diligence to hand something over. As a buyer you want the most time possible to think about any issues found and how to handle them in the best way. You do not want to be backed up against the wall and making a decision in a hurry. Sometimes sellers think if they string a buyer along and drop things on them at the last second that they will be so far along in time and money that they will have to close or at least be very hard to walk away.

Christopher Telles · Answer

Its a good thing you came here to ask this question. Your agent has misinformed you.

First, I am a 25+ year brokerage veteran of the commercial real estate business here in Southern California. The due diligence period is the time you have to investigate the property to insure its physical, environmental, and title aspects are to the Buyers satisfaction.

The lender will not do any work on your behalf. Any due diligence work conducted on the property is contracted for and paid for by the Buyer.  As the Buyer that's the way you want it. You need to actively lead any due diligence conducted on the property and then review any findings.

Typically the only involvement the lender will have in the due diligence process is ensuring you are using an environmental company that is on their approved environmental contractor list to prepare a Phase I environmental report.

During due diligence you should consider hiring a qualified contractor to inspect the physical premises. This inspection should be all inclusive of foundation, walls, roof, interior improvements, plumbing, and electrical.

You will also need to review the preliminary title report to insure marketable title will be conveyed, and no derogatory liens, easements or conditions exist that would impact the properties current or future value and or marketability.

A Phase I environmental report will need to be ordered from a qualified, and lender approved, environmental company.

There may be other due diligence items applicable to the specific property but without know much about the property or negotiated transaction its impossible to say what other due diligence items need to be addressed.

Best of luck, and send me a message should you have any questions or wish to discuss the property or the lease/sale of the property.

William E. · Answer

I've been looking into resources to help my by an apartment complex and I found this site that has some useful free videos and documents.

here is a page with a simple due-diligence checklist that may help you out.

http://www.commercialpropertyadvisors.com/avoid-ba...

Alon L. · Answer

Aaron, Christopher is correct.  I would add to the above that you may need to get a survey done  (or updated if Seller has one) in order to secure title insurance for you and your lender.  Ask about that now so that you do not get surprised later in the game.  Is this property going to remain occupied by any tenants after closing? If so, you (and your lender) will need to review tenant estoppels.  I would recommend reviewing their leases in their entirety, and very carefully.

Please reach out if you have any questions.  Good luck!

(Nothing contained herein is intended to create an attorney-client relationship nor to constitute legal advice.)

Christopher Telles · Answer

Good point. With less experienced investors buying CRE a good way to insure not only the above due diligence timeline is followed, but also for all the other items a Buyer should have access to or should review is to use an American Industrial Real Estate Association (AIR) purchase contract. The timeline protections are built into the contract. They are easily obtainable from the AIR if the agent/broker you work with don't use these contracts.

Joel Owens · Answer

I would find out why the seller is selling. There are strong motivators and weak motivators. Urgency by the seller to close a deal will generally let you know how far you can push the envelope.

For instance they might desire a year end closing for tax reasons or have another property they want to buy and have a small window to do it.

Weak motivator is putting the property on the market to test if they can get their price etc.

Oren K. · Answer

Aaron,

The inspections / information provided are a good starting point but get your own inspections done. Relying on the sellers inspections is like taking a used car sales persons word that a car was only driven by a little old lady on the weekend; Trust but Verify!

IF they did a Phase I and it was recent (e.g. Less the 12 Months) and the bank is willing to rely on it, you are well ahead of the game as that tends to be a long lead time DD item.

I agree with you regarding the truck well but not about the mezzanine portion assuming you can lease it out. If you can NOT lease it out separately, then you have a stronger argument.

Oren

Aaron Xie · Answer

Thanks, @William E., for the link.

@Joel Owens, the seller has provided all due diligence files on day one. there are so many files and I try to read each file carefully but it takes a long time. So far I have found the following problems:

(1) The survey shows that the sizeof the unit is over-stated in the contract. They count in the floor area of an unfinished mezzanine (850sqft), which is on top of the office. Also, the loading dock is within a truck well of 750 sqft. So that is a total of 1600 sqft unusable area.

(2) The pre-sale physical examination done by the seller shows that the air conditioning is at end of life, the roof needs maintenance, building needs new paint in 5 years, paving needs a sealcoat and restripe.

I will try to renegotiate the price with the 1600 sqft deducted from the total area, and factor in the required repair. That's a 20% drop in price. We will see.

Aaron Xie · Answer

Thanks for all the replies, guys. It's very appreciated.

It's a condo unit in a light industrial warehouse building. My agent is familiar with the seller and the building, as she has closed another unit in March.

The seller has provided the relevant due delinquency files, and the survey shows that the actual square footage is 12% smaller than advertised.

Luckily I have not make the deposit. Will contact my agent to renegotiate the price or we will pass.

A quick question: Is condo vs non-condo a big factor in determining the price, as for residential?

What to do after offer is accepted on a industrial warehouse?

Most Popular Reply