I recently read an article about things to know before buying commercial real estate and the same day I received a call from a colleague with concerns related to the acquiring a commercial property. So I decided to write this blog and shine a light on important items that needs your attention when buying commercial real estate.
Although there are similarities between residential and commercial real estate transactions, there are differences and complications:
- Zoning and Permitted Uses – Can I use this property for my business?
I gave this item first position as everything else comes after site selection. I encountered many property owners who purchased commercial property for their own business use, realizing their use is not allowed under the current zoning by-laws, after completion of the transaction. A zoning and by-law investigation is a must prior to making final commitment.
- Financing – Would my lender finance this property?
There is a big difference between residential and commercial mortgages.
Lenders have many more requirements to qualify a commercial property for mortgage financing. Commercial appraisal is required in almost all mortgage approvals, it is more expensive and paid by the buyer. The appraisal report may have an income approach and may require additional analysis such as a Building Condition Report.
- Environmental Assessment – Is this property contaminated?
Not only you may have environmental concerns, but also your financing depends on it. Lenders generally do not finance contaminated sites. An environmental Assessment Report may be required and depending on the results of the Phase 1 report, additional investigations may be necessary. Buyers usually end up with the bill these assessment reports unless they are recently obtained by the seller.
- Conservation Area – Can I develop this site?
Ontario has large environmentally protected and regulated areas in Simcoe Region that extends to highly developed communities such as Newmarket and Aurora. A buyer shall be aware of regulation and limitation in developing sites within conservation areas.
- Owner Occupied Audited Accounting – I’m buying this property for my own business operation. In cases of owner occupied commercial properties, your lender may ask for your annual audited accounting to ensure your business income remains sufficient to carry your mortgage payments. Not only you paid to get an audited accounting, but also you may have to pay any fees associated with reviewing your accounting by the lender.
- Higher Professional Fee – Legal and Accounting Fees. Your lawyer and your accountant will have higher fees for commercial real estate
transactions as they are more complex. Knowledgeable and experienced Metro Commercial Team members can assist you in every step of the way of finding the right commercial property that suites your business goals and reduce surprises in acquiring commercial real estate.
Shahnam Moghaddam is managing partner and Commercial Real Estate Broker at Metro Commercial team with over 18 years of experience in this field.