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Beware of purchasing distressed commercial property before asking specific questions, says Amity Insurance

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QUINCY, MA ISSUED JULY 13, 2011….The economic downturn that has played out over the past few years has hit the real estate industry particularly hard; as such prices on some commercial properties have decreased significantly, attracting investors in search of good purchasing opportunities. But potential buyers should look beyond the low buying price and consider a number of other equally important factors, according to Amity Insurance Agency, Inc., the region's leading full service agency.

Since many of these "reduced' properties were only partially completed when the financial crisis hit, buyers should assess their economic viability and physical condition. Questions that should be asked before entering into a purchase agreement include:

  • How much of the project has been completed and what remains to be done
  • Does any of the work need to be repaired or redone because the builder, facing financial difficulty, took shortcuts in material quality or construction
  • Do the original construction plans comply with current building codes and are there any design errors that need correction
  • What liabilities – including debt, lawsuits, penalties – will the buyer assume with the property
  • Who will be legally liable for any defects in the design or construction of the project
  • If the original owner and builder are responsible for the problems, can the buyer recover from those individuals
  • What insurance covered the original project; did one program apply to the entire project or did individual contractors have their own coverage
  • Will the insurance apply to construction defects
  • If a single wrap-up insurance policy covered the project, did it include a deductible or self-insured retention; if so, and the insured owners or contractor has declared bankruptcy and is unable to pay it, will the insurance still apply
  • Does the original wrap-up policy extend completed operations coverage beyond the policy's expiration date and if so, for how long

Prospective buyers should pay special attention to builders risk insurance on the project. If the original developer purchased this coverage, the policy may have cancelled after work on the project ceased. A policy purchased by the general contractor may still be in force, but the buyer should review its terms and conditions carefully. The buyer should also check to see if the policy covers catastrophic events, such as flooding and tornadoes.

A property may have a low price, but it's no bargain if it comes with a host of issues. Arranging insurance on a property with severe problems may be difficult; an insurance agent or broker experienced in obtaining coverage for such properties can help sift through the issues and identify appropriate policies.