Introduction:
Site preparation, surveys, and title work, in particular, frequently play a significant role in commercial real estate. As a result, we’ll utilize this post to answer the following questions: what is an ALTA Survey, and why is it important?
Investing in Commercial Real Estate
Many real estate investors progress from residential to commercial properties. While some phrases apply to both forms of property, commercial real estate introduces a whole new vocabulary. Investors must immediately master this new language to succeed in commercial real estate. Site preparation, surveys, and title work, in particular, frequently play a significant role in commercial real estate. As a result, we’ll utilize this post to answer the following questions: what is an ALTA Survey, and why is it important?
Classifying property as commercial has ramifications for how it is financed and taxed and how the laws apply.
Commercial Property Dissection
Malls, grocery stores, offices, industrial estates, manufacturing firms, and other structures are examples of commercial property. Commercial property performance, including sales prices, new building rates, and occupancy rates, is frequently used as a proxy for economic activity in a given region or economy. For example, the RCA Commercial Property Price Indices track price fluctuations in commercial real estate across the United States.
Commercial real estate has been a great bet. The initial investment expenditures for the structure and the costs connected with tenant customization are higher than in residential real estate. However, overall profits can be higher, and several common issues when dealing with residential tenants are avoided when dealing with firm and clear leases.
Commercial property investors can also use the triple net lease, in which the firm leasing the premises bears expenses such as real estate taxes, building insurance, and upkeep. Residential real estate investors do not have access to this benefit.
Commercial property benefits from more simple pricing in addition to favorable leasing conditions. A residential property investor must consider various aspects, including a property’s emotional appeal to prospective tenants. On the other hand, a commercial property investor can rely on the income statement, which displays the value of current leases, which can then be compared to the capitalization rate of comparable commercial property in the vicinity.
We’ll go through the following subjects in particular:
- Overview of ALTA and NSPS
- What exactly is an ALTA survey?
- Last Thoughts
Overview of ALTA and NSPS
What is the definition of “Title” in Commercial Real Estate?
Before delving into ALTA Surveys, new investors need to understand the notion of “title” in commercial real estate.
The title relates to property ownership. When investors inquire about the title to a property, they need to know who is the owner of the property and is anybody else have a competing ownership claim? More specifically, the title refers to the documentation indicating the real estate’s legal owner(s).
Title studies are an important part of deal due diligence in commercial real estate transactions. Buyers will commission a title study before closing on a deal. This analysis establishes that the seller owns the real estate involved in the transaction and has no competing claims. These investigations, in turn, affirm that the seller has the legal right to sell the property.
If a property does not have a clear title history, the seller most likely does not have the legal authority to sell the property, which will cause a transaction to fall through. ALTA and NSPS established standards to avoid such an occurrence.
Overview of ALTA
“ALTA members seek, analyze, and ensure land titles to safeguard purchasers and mortgage lenders who invest in real estate,” according to published literature. ALTA establishes the key title-related standards that govern commercial real estate transactions.
Overview of the NSPS
Land surveys are intimately related to the title. These technical methods describe the land, boundaries, and improvements included in a real estate transaction, assisting in confirming that reality matches the legal description in title papers. The National Society of Professional Surveyors, abbreviated as NSPS, is the trade group for American real estate surveyors. This organization establishes survey work guidelines to ensure that these reports assist title research.
What exactly is an ALTA survey?
Overview and Key Elements of the ALTA Survey
The ALTA Survey is considered the gold standard of commercial real estate surveys. These extensive analyses provide title insurers, which insure against defective title claims, with proof to grant title policies. However, as we’ll see below, ALTA Surveys provide important information to potential buyers.
An ALTA survey is “a thorough land parcel plan, indicating all existing improvements of the property, utilities, and notable observations inside the insured estate,” according to industry leader Partner Engineering and Science, Inc. The survey also includes the qualified surveyor’s findings regarding the property boundaries and their relationship to the title.” Legal descriptions of property are included in title documentation, and ALTA Surveys ensure that these legal descriptions reflect the facts on the ground.
While real estate investors can order boundary studies to establish the boundaries of a specific parcel, these surveys do not provide the complete detail of an ALTA Survey. The latter incorporates the detail and decision-making support of a boundary, title, and location survey into a single industry-standard report.
And it is because of these norms that ALTA Surveys are so valuable. According to Partner Engineering, “the ALTA standards defining the content of all ALTA Surveys […] are denoted in the American Land Title Association and National Society of Professional Surveyors’ Minimum Standard Detail Requirements for ALTA/NSPS Land Title Surveys.” When you commission an ALTA Survey before a commercial real estate transaction, all parties — lender, buyer, title insurance – know that the linked report meets professional conduct requirements.
Why Are ALTA Surveys Important in Commercial Real Estate?
Commercial real estate transactions frequently entail large sums of money. As a result, investors should do extensive due diligence before closing any acquisition. ALTA surveys give essential information on the following due diligence items:
Support title studies: ALTA Surveys are frequently used by real estate attorneys to conduct title studies.
Assist with site plans: When site plans are created for a new development, civil engineers and architects will consult ALTA Surveys for essential land and improvement information (e.g., dimensions, utility locations, easements, current improvements, etc.).
Avoid boundary disputes: ALTA Surveys portray a parcel’s existing boundaries with adjacent parcels clearly and accurately, so that buyers know exactly 1) what land will be theirs and 2) where the neighboring parcels begin.
Confirm existing easements and land-use limitations: ALTA Surveys include easements (for public access, utility lines, and so forth) and existing land-use restrictions. Any development plans must account for these property characteristics.
Lender and insurer requirements: Many lenders need an ALTA Study for commercial real estate transactions. However, some will accept a less complete border survey. Furthermore, many title insurers may need an ALTA Survey before granting title insurance coverage for a commercial real estate transaction.
Confirm current municipal zoning and compliance: While it is not a statutory requirement, most ALTA Surveys include a parcel’s current municipal zoning and compliance. For example, do the current property improvements match the standards of a lot classified for light industrial use? Otherwise, are any infractions grandfathered? Buyers want to avoid becoming accountable for correcting earlier zoning infractions as the new owner, which could be a pricey undertaking.
Successful commercial real estate investors realize the value of surrounding themselves with a team of specialists, which includes surveyors. You don’t have to be a professional surveyor to be an investor, but you should grasp the value of ALTA Surveys in any commercial real estate transaction.
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