Advice needed on making offer for commercial building, condo conv

[Michele G.]

I would very much appreciate feedback from experienced developers. 

How do experienced developers make an offer on a building knowing that it would require 30+ days for due diligence to see if the project is feasible? I would I secure the option to buy with the understanding I could back out in 30 days for any reason while I assess the project. I won’t be doing an inspection on the building.

The building is about 12k sq feet with architectural plans already in place to convert to 12-14 condos. I walked the building with experienced contractors last week and they will provide an estimate of the cost. There are other elements of the deal that I have to assess like parking, tax credits, speak to the city planners, bank lending structure etc that I estimate will take 30 days to evaluate whether the deal is good or not. 

Thank you. 

Michele

[Greg Dickerson]

Originally posted by @Michele G.:

I would very much appreciate feedback from experienced developers. 

How do experienced developers make an offer on a building knowing that it would require 30+ days for due diligence to see if the project is feasible? I would I secure the option to buy with the understanding I could back out in 30 days for any reason while I assess the project. I won’t be doing an inspection on the building.

The building is about 12k sq feet with architectural plans already in place to convert to 12-14 condos. I walked the building with experienced contractors last week and they will provide an estimate of the cost. There are other elements of the deal that I have to assess like parking, tax credits, speak to the city planners, bank lending structure etc that I estimate will take 30 days to evaluate whether the deal is good or not. 

Thank you. 

Michele

 First for commercial you always want to run the contract by your attorney before you submit to the seller or respond to an ofer from a buyer. This applies to leases as well.

For a project like this you should ask for at least 90 days due diligence to vet all approvals, conditions, financing, inspections etc. Once 90 days is up you set closing for 30-45 days after that. That is fairly typical timeline unless there is a lot of competition and you need to shorten time frames but 30 days will pass very quickly.

That being said you word the offer to purchase exactly as you describe. The due diligence period is "X days" where you can cancel and get EMD back anytime during that period for any reason. Once you determine you are moving forward you remove the contuingency in writing and the EMD goes hard.

[James Storey]

Ditto to wait @Greg Dickerson said. Try to make Due Diligence as long as possible. The longest I have personally used and seen has been 90 days in which the purchase agreement will have a list of conditions for the buyer to be able to back out in the timeframe and receive their earnest money back. For some of these deals, I have seen the seller try to get 60 days of due diligence with an option to extend by 30 days with hard earnest money. Try not to get trapped into something like that.

Makes sure you have a good architectural team on your side that understands there is a timeline to be able to complete schematic design and run surveys. Possibly even a construction manage that will work in tandem with the architectural team though it can be more effective to bid out the schematic design after completing. These things are what takes up most of the time in due diligence.

James Storey, CCIM

[Ronald Rohde]

I would even have a zoning or PZ approval as contingency, if the conversion is the highest and best use, you'll be willing to pay top dollar and the seller should be willing to wait. With COVID delays, I wouldn't want to be facing a 60-90 day deadline without firm city approval.

Are you doing this without a broker or attorney? Its a highly complex project...

[Michele G.]

Thanks @Greg Dickerson, @James Storey, @Ronald Rohde for your advice.  I ended up not bidding on the property but your feedback and advice were excellent and I will take this knowledge for the next opportunity. Much appreciated.