Don’t Forget Contents in Conducting Due Diligence on Your Next Commercial Real Estate Purchase –
You know how important it is to conduct due diligence when you invest in an existing property.
Due diligence refers to the analysis the purchaser conducts prior to submitting an offer to purchase. Based on the results of this analysis you may decide to purchase … or not.
Of course, the analysis will include financial information, but it also should incorporate any and all other factors that are considered material to the purchase of the property, such as the condition of the property, information on existing tenants and an inventory of the building’s contents.
In this inventory, you will need to establish what are chattels and what are fixtures – what will stay and what will go.
This is vital, especially in a commercial real estate purchase ; defining and analyzing everything that is included in the sale actually determines the market value for the property and will have a significant impact on price.
Chattels and fixtures defined
Chattels are items that can be removed without damaging the property. Usually this refers to movable possessions, such as office equipment and items of personal property including furniture and paintings.
Fixtures are attached to the building and therefore considered part of it; to remove a fixture might damage the property.
Furnaces and HVAC equipment fall into this category. (Note: Window air conditioners don’t; they are considered chattels.) Built-in shelving also is considered a fixture but freestanding shelves aren’t.
In most cases, the way the item is attached to the premises and the impact it would have on the property if it were removed defines it as a chattel or a fixture.
Contents inventory is key
An unbiased third party should conduct an inventory of the contents that will be sold with the building.
Even though the seller is selling chattels with the business (as in the case of the sale of a retail outlet in which the seller is transferring the inventory) and has prepared a detailed inventory, the buyer should obtain an accounting of the inventory by a third party to establish the value of chattels.
Especially in cases like the one mentioned above, chattels will affect the purchase price.
Their net value will be rolled in with the value of fixtures and other fixed assets in determining the overall value of the purchase and therefore the price you will be willing to pay.
Regarding contentious items
After you’ve conducted your due diligence, you should know exactly what you’re planning to purchase, and your offer should be based on this understanding.
However, there may be contentious items that should be resolved during the negotiating process.
If you want to purchase certain chattels, ensure that this is spelled out in the agreement of purchase and sale.
Similarly, if you don’t want something left on the premises, there should be a plan in the agreement for its removal.
Through due diligence, careful inventory by a third party and a strong agreement, your investment is ensured.
If you need assistance, contact your commercial real estate agent, who is experienced at all stages of the purchase.
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This article and any information contained herein are intended for general informational purposes only and should not be construed as legal, financial or medical advice. The publisher takes great efforts to ensure the accuracy of information contained in this newsletter. However, we will not be responsible at any time for any errors or omissions or any damages, howsoever caused, that result from its use. Seek competent professional advice and/or legal counsel with respect to any matter discussed or published in this newsletter. This newsletter is not intended to solicit properties currently for sale.