In the last post we learned how I decided to put an offer on my very first commercial purchase – an old movie theater in the downtown area of a secondary market in the city of Salinas. In this post I’m going to share the things that we had to do on our own during the due diligence process of this purchase, as well as the things that our attorney looked at and objected to on the title report.
What did we on our own:
1. Checked Geotracker which is a website to see if there is contamination near the property. This helps us understand what our Phase I report will probably look like. The Phase I report is an environmental report that costs around $3,000-$4,000 and that you must do in order to see if the ground of the property is contaminated. If it is contaminated, it’s going to be very costly to decontaminate the property, and the city will make sure that you eventually decontaminate the grounds. It’s very important to know if your property is contaminated or not. When you search Geotracker, you’re able to have a preliminary idea if it is contaminated or not, based on existing data.
2. Checked the current assessed value of the property to see how much taxes they were paying.
3. Reached out to the City Department Services Division, and the Community Development Division and asked to see if there were any approved permits for the property. I also had to find out information on zoning in the downtown area to see if we could do what we wanted to or not.
4. Because we were potentially going to run this as a business and do events in the property, I had to check prices for the following: audio and visual installation, new chairs, how much it would cost to level the floor, how to dispose of the existing chairs (could we sell it or not?). I also had to find out how much we could charge per event and the costs associated with that (tables, catering, security, electricity, water, etc).
Below is a list of the reports that we paid for during the due diligence process, and the contractors that we had come by to give us quotes:
1. Phase I Environmental report: the report came out clean (as we expected after checking Geotracker).
2. Roof survey: we found out that it was going to cost us around $127,000 for a new roof since the existing roof already had three layers on it, and we could not add another layer. We had to redo the roof from scratch.
3. Structural engineer: we had one come by to assess the structural damage and do a shear wall test – this meant that he was going to test how strong or how weak the wall was and he was going to tell us if we had to redo the wall entirely, or just reinforce it.
4. Architect: the architect came over to assess some of the costs that we were going to incur during the renovation.
5. I had to find a person that was working at Calwater (California Water Service) in order to find out where there was a water source for the building. Also, where was the line, and if there were fire hydrants near the property. During this process I learned that in California the businesses are the ones who have to pay for installing a public fire hydrant if the property does not have one nearby! This alone can cost at least $50,000. We had to understand how much it would cost for us to pull in water for the fire sprinklers because the property was not up to code and we would have to install fire sprinklers.
6. Fire sprinkler contractor: he came over to give us a quote on how much it would cost to install the fire sprinklers. We ended up finding out that we would have to bring water from the back of the building to the front, and that was going to cost quite a lot of money (I believe it was around $100,000).
7. I also tried to get someone in the city to see if we could ask for some credit to renovate the property because the property was in the downtown area and the building had been abandoned – and the community would have benefitted from bringing that property back. Unfortunately, we didn’t manage to find people there up until the end of the process.
The property had several code violations – not surprisingly since the owners did not keep up with maintaining it up-to-date. During our due diligence process, the city started issuing fines (rightfully so), and if the seller did not respond within X number of days, the city was going to start charging them $2,500/day. The seller did say that they were going to pay any outstanding fines prior to close of escrow.
Next, I’m going to go over what the title report said, but before I do that I want you to know what the title report means. The title report means that the title company will compile a report from a search in the County records in order to issue you a title insurance and any liens against the property will be listed in the title report as exceptions to the title insurance. This means that the title company is not responsible for those items! Our attorney reviewed all of the exceptions and objected to four of them.
Items we objected to on the title report exceptions:
1. We were in what’s called the “Monterey Regional Water Pollution Control Agency” and we had to reach out to them to see if there were any past due amounts and to make that there were no restrictions on our intended use of the property.
2. There was a “Party Wall Agreement” that was dated 1999 and it ended up being actually dated 1919. This party wall agreement meant that we were sharing one wall with our neighbor and that there was an agreement out there that the title company did not find, so they were making an exception to that. After a lot of back-and-forth, we requested the title company to find the agreement (because that’s their job!) and after several days they gave us an agreement that had nothing to do with the party wall agreement – or that property as a matter of fact! After another two weeks of back and forth with the title company, they somehow managed to find that party wall agreement (yes, it’s amazing how many people don’t do their job), and this agreement was dated 1919.
3. The next exception stated that we were in a Redevelopment Agency, our attorney said that most Redevelopment Agencies were extinguished as a result of a law signed by Governor Jerry Brown. However, the title company was not removing this exception because the city of Salinas was in debt, and this would not be removed until the city of Salinas was out of debt, which they said it was going to be around 2033.
4. The last exception was a notice that the County of Monterey proposes to Annex the property into the California Home Finance Authority Community Facilities District No. 123, Clean Energy. The attorney said that he does not have such documents and the title company did not provide them. So we had to find those documents and see what the impact would be on our property.
In the next episode, I’m going to go over the financial calculations for all three options that we had in mind for the property, review the conclusion, and lessons learned.
Learning is not attained by chance, it must be sought for with ardor and diligence.