Commercial Real Estate Documentation: Purpose & Preparation

Instructor: Eileen Cappelloni

Eileen worked for the Orange County Asssociation of Realtors for 31 years. She has written real estate courses and exams for other publishing companies

This lesson will explain how to prepare specialized commercial real estate documentation and discuss dealing with 1031 Exchanges, permits, and regulatory approvals.

Before Buying a Property

John Myerson is a residential real estate broker and has a small office in town. He's successful in his field and has decided he needs a larger office. ''I'm going to buy and develop a piece of land and build a new office there!'' he thought.

John calls a friend of his, Erin, who's a commercial broker and has experience in developing business properties. Erin stated that the most important, but not always obvious, first step to development in a commercial area is to ensure that the land has all approvals in place and that it is already zoned for commercial development. There are lots of documentation to be filed, so she goes over all the steps and terms.

Due Diligence

Erin and John discuss the importance of performing due diligence when they first find a property, meaning to take all the reasonable steps to evaluate an investment's assets, liabilities and potential. This means:

  • researching and verifying the history of the property
  • ensuring that the proper permits are filed
  • asking all the professionals involved (including landscape architects, civil engineers, site planners, attorneys, environmental consultants, surveyors, title companies and lenders) to provide their input and conduct any necessary testing or analysis so that an opinion of the property's worth can be made.

Erin went on to tell him that the commercial real estate development process consists of several stages. A primary and important step is site selection, or determining if a proposed piece of property will meet the requirements of the buyer. In John's position as the owner of a real estate office, was he looking for walk-in traffic or more of a meeting place for closings and conducting business?

Once John has determined what his needs are, he can then consider a possible site to develop. Erin advised him that he should have a market analysis and feasibility study completed on a potential site to analyze the feasibility of the investment property before continuing onto the next steps.

John will also need to hire experts to conduct environmental assessments, surveys, site plans, development and building plans, as well as acquiring the proper permits.

Necessary Documentation

Erin goes on to describe the necessary documentation John will need to understand.

Sale Deed

A sale deed is the legal document that acts as proof of sale and transfer of ownership of the property from the seller to the buyer.

Before executing the sale deed, John should ensure that the property has a clear title, and also confirm if the property is subject to any encumbrances. The seller should also verify that the settlement of all necessary payments such as property taxes, water charges, impact fees, electricity charges, maintenance charges etc., are up to date and stipulated as such in the sale agreement with the buyer.

Parent Document

The parent document traces the original ownership of the property up to the present day. Commercial banks do require, at the least, that the following documentation be provided:

  • Copies of land documents for at least thirty years, to include the parent document or mother deed
  • Encumbrance certificate for a period of thirteen years
  • Property tax paid receipts

It is very important that the parent document records the references to previous ownership sequentially.

Building Approval Plan

A building plan receives approval from either the local Municipal or State Authority. A building owner has to have an approval that is based on the proper zoning, road width, floor area ratio and plot depth. The owner must submit documents in order to obtain a building approval plan, including:

  • Title Deed
  • Property assessment extract
  • Property PID number
  • City survey sketch
  • Receipt for taxes
  • Property drawings
  • A complete plan drawn up by a registered architect who will design a plan that adheres to the municipality's requirements.

Not all municipalities operate the same way, nor require the same plans and filings for permits to meet their regulations. Developing property may require public hearings or special notifications, and the builder/developer might need to participate at meetings in order to answer questions and provide other information.

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