Stan Mullin specializes in the sales and leasing of industrial land and buildings in southern Orange County, California.

His areas of expertise include: entitlement, contract language, construction schedules, development, assessment district and community facility district bond financing and he specializes in corporate real estate matters.

Before You Lease or Buy…Focus On These Issues

Author: Stan Mullin, CCIM, SIOR

The tendency for many buyers and tenants of real property, commercial or residential, is to focus on the primary economic business points such as price, rate, rental adjustments, deposit amount and financing. Although critical to the success of your project, there are a litany of other issues that impact the property, about which you should have a clear understanding, before you make a commitment. 

This article will address issues that, if a problem occurs and it is not addressed properly in your lease or purchase agreement, could cost you more than the value of the property. As well, provided are a few suggestions to help insure that the agreement contains provisions that will protect your interest and comply with the law.

Material Defects – Probably the most commonly addressed item in the “due diligence” process, you should determine if there are any physical defects in the property. Have a contractor or consultant that specializes in this area inspect the property. The inspector should provide a written list of the property components that he has inspected and his or her findings. The primary areas of concern should be the condition of the structural components of the building such as the roof, foundation, flooring and walls. If a flaw is identified, first elect to have the seller or landlord make the repair or replacement before you close or commence the term. If the building owner will not agree to the “prior repair”, then make sure that: a) the owner indemnifies you against any cost resulting from the failure of the flawed portion of the property and b) he is obligated to either make the repair after the close or lease commencement or that a sufficient amount of money is set aside by the owner for you to make the repair.

Equipment – You should make sure that the heating, ventilating, air conditioning, electrical, lighting and plumbing systems are in good condition. Air conditioning compressors, particularly those supporting a large building or designed for high technology firms are very expensive to replace. Do the dock load levelers work? How about the loading doors or the safety systems? Is the air conditioning balanced and zoned properly? These are some of the questions you consultants should answer before your commitment to the space.

Soils Conditions – This is an area that is often overlooked. You should find out if the property is in an area that is subject to flooding, ponding, drainage or soils problems. How about settling or sliding (if it is on a terraced or sloped site)? Has the building or any of the structures on site been subject to these problems in the past? Studies showing the compaction and condition of the soil along with any reports conducted at the time of initial site development are useful in determining the suitability of the property for work contemplated for the building. Contact the city in which the building is located and ask if there are any records on file, which show inspections or repairs performed on the site.

Utilities – Make sure that the property is served by the utilities (public sewer system, electricity, natural gas, domestic water, telecommunications, etc.). It is particularly important to memorialize this information in new developments. You should find out who is installing these systems, when, the means by which it will be paid for. Sometimes roads, drainage systems or utilities are paid for through assessment districts (“A.D.’s”) or community facility districts (“CFD’s”). If either is the case, the cost can be passed on to you through supplemental charges on your property tax bill (AD’s have a finite duration such as 25 years and the principal is fixed whereas the life and principal amount of CFD’s can vary). 

Learn if the installation or planned upgrades in your utilities will impact the access to your building, the service provided to your business or obligate you to any future expense. Also, determine if the utilities represented as serving your new property are in fact, accurate. Because the power panel inside the building states that it can accommodate a particular amount of power, it does not mean that the building is served by that amount of power. If there is air conditioning ducting in the warehouse, does it mean that the warehouse is air-conditioned? No. It is possible that the AC units were never installed on the roof or the previous occupant could have taken them when they vacated the property.

Natural Hazard Zones – Sellers are often obligated by state or local jurisdictions to provide buyers with information about fault rupture zones, fire and flood hazard areas, but the same information is useful for tenants. If you plan to invest a large amount of capital in your building, even if you carry sufficient insurance for real and personal property, the risk of temporary loss and business interruption may make the decision to select an alternate property. To learn more about the risk by natural hazard to your new property, contact the Federal Emergency Management Agency. They can provide the booklets, maps and other information useful for these disclosures. In addition, EQE International and Vista Information Services are two firms, which specialize in providing information of this type at a reasonable cost.

Compliance With Laws – Have you checked to see if your proposed use is acceptable within the zoning impacting the property? Does the property or any improvements made to it violate any CC&R’s, association rules or laws? It’s not uncommon to lease or buy a property and be unaware that modifications were made, without the required municipal permits. What happens if you take the property in this condition and later plan on making your own improvements, which require permitting? Unless your lease or sales agreement places the burned on the seller or landlord, you will not be granted permits to do your new work until the building is modified to satisfy city inspectors for the prior unpermitted work.


Hazardous Substances – This is the area that is of greatest importance. You do not want to take on liability for any contamination that either existed on the property a) prior to your possession of the premises or b) that is caused by anyone unrelated to you or your business. As a buyer or tenant, make sure that your attorney includes language in your agreement that addresses this issue. The forms produced by the American Industrial Real Estate Association (office and industrial documents) address the topic well. Make sure and walk the property, with a consultant specializing in this area and look for evidence of below ground storage tanks, asbestos, transformers containing PCB’s or any other hazardous or infectious substance. Inquire if there the landlord, seller or local municipality has any Hazardous Materials Data Sheets on file, which your consultant can review. Any information pertaining to any existing or previous contamination of the property or contamination effecting or threatening to effect neighboring properties should be provided to the buyer. I know of a case where the dumping of two gallons of a fluid into the ground, ten years prior to the sale of a property, cost over six million dollars to remediate. Once you take possession, make sure that your employees handle these materials in an equally careful manner.

Legal & Governmental Proceedings – Always try to find out if there is any litigation that is pending or threatened before any court, arbitration tribunal, agency or governmental agency that would effect the property or the right or ability of the owner to convey, occupy or utilize the property. Your lawyer can help perform this type of background search. As well, make sure that the seller or landlord have the authorization to convey the property to you.

The same applies to governmental proceedings. You should know if there are any existing or contemplated condemnation, environmental, zoning, developmental plan or other land use regulation proceedings which could detrimentally effect the value, use and operation of the property.

Unrecorded Title Matters – Do you know if there are any encumbrances, 
covenants, conditions, restriction, easements, licenses, liens or charges or other matters, which affect the title o the Property that are not recorded in the official records of the county recorder where the property is located? As buyer, you should know the answer.

Leases – Legible copies of all leases, subleases or other tenancy agreements affecting the property, recorded and unrecorded, should be given to the buyer or tenant along with any documents, which modify or guarantee the leases along with any default notices.

While not comprehensive, these suggestions should provide a framework of issues to discuss with your consultants prior to entering into an agreement to lease or buy. In all cases, review the specifics of your transaction with your legal, tax and real estate advisors before you commit to real property. Advice from experts will help mitigate the risks and maximize the benefits from your new property. As well, use of the AIR Property Information Sheet will help address these issues with your seller and landlord.

Stan Mullin is a Senior Vice President in the Newport Beach office of Grubb & Ellis and specializes in corporate real estate matters. You can learn more about his firm by looking up www.grubb-ellis.com and he can be reached at smullin@earthlink.net.