In many areas, the real estate sector has been hit hard. Commercial properties, 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, you need to weigh the decision carefully by using some guiding questions.

12 questions to ask before purchasing distressed commercial property

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.

If there has been a prolonged 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 difficult or even impossible. However, with careful examination of the properties and all that comes with them, buyers who do their homework may be able to uncover profitable opportunities.

Contact Us

© Copyright 2022 Thomson Reuters. 

Disclaimer of Liability
Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.




Nonprofit Insights


Valuation Report