HVAC on Commercial Office/Retail Properties

[Joseph Parker]

Making an offer this week on a 5-unit property (could be six units, currently set up as five, all occupied), consisting of two separate buildings in my town. Total square footage around 5,900.

Each building has three separate gas furnaces and A/Cs. So six total. I know that two of them have been replaced in the past five years or so, and plan to have those and the remaining four inspected if the purchase moves forward.

Being my first commercial property that is not multifamily, I'm looking for any advice or tips when it comes to checking out these major systems while under contract. Obviously, the idea of six separate systems somewhat terrifies me simply due to the cost incurred when repairing/replacing these. I understand why each unit has it's own system (each has it's own environment), but what kind of negotiating tactics has anyone found successful if/when an inspector notes that the older units are in rough condition? Do I treat it as if I were purchasing a home and ask for a price reduction/credit towards those systems if they are in poor condition?

Just thinking ahead here!

[Joel Owens]

My experience is you get  a reserve credit at closing from the seller for the items not working properly or reaching the end of their life expectancy.

Even if tenants for example are base rent plus CAM and pay for it they hardly ever have the extra money on top of the estimated typical base CAM payments monthly. So in that case the landlord ends up fronting the money and takes typically years to fully recover from the tenants.

I like to get inspection early in the process to get these credits right away before big money is spent on attorney,title, lender reports ( environmental phase one, ALTA level one survey, appraisal,etc.). If seller knows you are deep into the property in costs and time and ask for a credit they like to stick it to you more. If they know you have little into the deal with time or money and are motivated to sell they usually play ball on the credit. It is good to get the signed amendment in writing. I also look at credit for parking lot to re-coat and fill cracks, redo the roof, and if I expect tax reassessment upon purchase then get tax credit. I call local tax attorney to get an idea if taxes should stay the same or will go up by a considerable amount.

You want a reserve as a credit so you can pull for that to repair or replace things instead of affecting cash flow. You need to make sure with your lender that they will allow a credit held in reserve at closing instead of trying to use the proceeds to lower their loan amount and try to reduce the risk to them with a lower LTV.

Good luck. No legal advice given.