Ten Tips for Buying Commercial Property in California

buying commercial property California

Buying commercial property in California is far harder and more complicated than most people realize, at least compared to a few other states. The entire transaction is a blend of rules and regulations set forth by the state and federal government. You will be required to look at it not just from a financial perspective but legal, structural, and environmental as well.

1. Researching the Property

Before you invest in commercial real estate in California, you need to get really clear about current laws governing this industry, which may also extend to other property types in the state. If you don’t, you run the risk of losing the property to liens, lenders, or other parties that have interest in the property.

2. Researching the Seller

Sadly, far too many investors end up with spotless commercial buildings but owned by unscrupulous sellers. This means buying commercial property in California needs extensive research, planning, and due diligence. The investor/buyer should look into the reputation of the seller and his/her transaction record.

3. Land Use and Zoning

There are many different zoning types in California, all of which should be very clear to you before you invest in a commercial property. Non-compliance with one or more zoning laws can lead to irreversible and significant liabilities on the buyer’s part. It’s important, as an investor/buyer, to obtain everything related to the property, including originals and copies of licenses, permits, certificates of occupancy, and so on. Past code violations, as well as any pending violations, should also be researched thoroughly. Of course, you want to purchase real estate right away because it seems like a bargain, and it has great potential. But the clearer you are now about these issues, the easier it will be to ensure that the property is not a money pit.

4. Surveying the Title

Take some time to get a clear picture of the commercial investment in terms of the legal description of the property. The title company you hire will help you do that. Make sure you understand the clear motivation of the seller as well. There may be some sellers whose reasons to sell may be inherently misaligned with your expectations. The seller may be trying to sell the real estate that contains title issues, or he or she may be trying to dispose of it for potential defects. Inaccurate property identification can lead to a major issue down the road. Through a title company, you will not just obtain a commitment but also the ALTA/NSPS land survey, which is another element to add to the title’s authenticity.

5. Environmental Considerations

Property contaminated with pollutants from current and previous activities around the area is subjected to environmental site assessments. You need to find out if such assessments took place for the property you are buying. And if it did, you need to obtain copies of the reports for the same. Certain concerns such as fire hazards, presence of mold, asbestos, and underground storage tanks also call for federal and state assessments. What impact these elements will have on you, your business, your employees, your vendors, and the entire logistics, the people living near the property, and the environment in general? All these areas need to be assessed as well.

6. Encumbrance Certificates

Buyers and investors in California are subjected to the same restrictions as that for sellers with regards to easements, covenants, and other encumbrances related to commercial properties. Most encumbrances for buying commercial property can be found in county records. However, you may find this an extra exercise or may simply assume that the seller has it ready for your perusal. The best thing to do is to put those assumptions aside and home in on doing the research yourself.

7. Current Valuation of the Estate

Some buyers may want to cut to the chase and skip the part of valuating the property professionally. But it’s well worth your time and effort to get it appraised and for multiple reasons. First, your title underwriter may need this information, and your lender may demand it. Second, you may discover the difference between the real value and market value when professionals assess it in person. Spending some time upfront to make this happen is one of the best investments you can make to avoid the headache of dealing with the discovery that the property is worth much less than what you paid. This valuation may also come in handy for investigating property tax-related issues.

8. Paying Taxes

Finding and investing in commercial real estate requires that you have an idea about what your yearly tax bill would look like and how you are going to pay for it over the course of ownership. Remember, unpaid taxes can lead to liens followed by foreclosure quickly in California. Your decision to purchase, therefore, should be driven by your ability to pay property tax every year without fail.

9. Leases and Guaranties

It is not advisable that you be rigid and uncompromising when it comes to tenant leases if any. But most investors have commitments that are so important to them that compromising on leases would make it hard for them to carry on with business. Doing the due diligence on identifying leases and guaranties that are in effect and determining which one to carry over after the purchase is crucial before buying a commercial property. There are sellers who share your values and will be eager to furnish the necessary details.

10. Income and Expenses

You should obtain an accounting of all incomes, expenses, and security deposits held by the seller on the behalf of tenants as well. In California, it’s mandatory that the seller provide rent rolls, financial statements, and other related documents to the purchaser. While rent is almost always straightforward, expenses may be in the form of common area maintenance, utilities, salary to employees, insurance premiums, and service contracts for which you need the ledger details.

Want to find out more about buying commercial property in California? Contact Coast & Valley, the commercial property management of Salinas CA right away!