MLR

A Dozen Questions to Ask Before Buying Distressed Commercial Properties

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In many areas, the real estate sector has been hit hard. Commercial property, including apartment complexes, retail and industrial properties are down in value. This may attract investors in search of good buying opportunities.

However, potential buyers should look beyond low purchase prices when they evaluate these properties. The properties’ physical state, legal issues, and insurance considerations also affect whether they are smart investments.

Many of these properties were only partially completed when financial crisis hit, so buyers must assess their economic viability and physical condition. If you are interested in buying, here are 12 questions to consider:

1. How much of the project has been completed and how much remains to be done?

2. Does any of the work need to be repaired or redone because the builder, facing financial difficulty, took shortcuts in material quality or construction?

3. Do the original construction plans comply with current building codes? Are there any design errors that need correction?

4. Are there any significant changes that you would like to make to the project?

5. What liabilities (debts, lawsuits, penalties, etc.) will you assume with the property?

6. Who will be legally liable for any defects in the design or construction of the project?

7. If the original owner and builder are responsible for the problems, can you recover from them?

8. What insurance covered the original project? Did one program apply to the entire project, or did each individual contractor have its own coverage?

9. Will the insurance apply to construction defects?

10. If a single wrap-up insurance policy covered the project, did it include a deductible or self-insured retention (SIR)? If so, and the insured owner or contractor has declared bankruptcy and is unable to pay it, will the insurance still apply?

11. Are there special conditions that must be met before the policy will apply when the deductible or SIR cannot be paid?

12. Does the original wrap-up policy extend completed operations coverage beyond the policy’s expiration date? If so, for how long?

Prospective buyers need to pay special attention to builder’s risk insurance on the project. If the original developer bought this coverage, the policy may have cancelled after work on the project stopped. A policy purchased by the general contractor may still be in force, but the buyer should review its terms and conditions carefully.

Due to the long period of inactivity, vacancy and unoccupancy provisions may have taken effect. The buyer should also check to see if the policy covers catastrophic perils such as flood and earthquake; lost income and extra expenses resulting from delays due to covered perils such as fire or vandalism; and the extent of coverage for testing.

Regardless how low the price may be, the property is no bargain if it comes with a host of physical and legal problems. Arranging insurance on a property with severe problems may be very difficult or even impossible. Your professional advisors who are experienced in the real estate and insurance markets can help sift through the issues and identify appropriate policies. There is no substitute for a careful examination of a property and all that comes with it. Buyers who do their homework may be able to uncover profitable opportunities.