Easements and encroachments can be the unknown deal killers in both residential and commercial transactions.
Often times during residential surveys we see a fence line on someone else's property. On commercial transactions things get much more complex with easements and encroachments. This is a major concern on development projects where we have utility easements, setbacks, restrictions, and ariel easements.
I was retained to help a buyer last year purchase a building they had been leasing. Their initial lease term of 5 years was almost complete, and the property owners let them know they would entertain a sale to my clients that occupied a majority of the building. So after a consultation with my buyers looking at market reports and trends we came up with an offer price and plan for the property.
Then I asked for a tour of their space, the property, and what they know about it. During the tour they disclosed they did some significant remodeling to the property on the interior and exterior. They even built new driveways, extended the building, and created additional parking. So I asked for a survey to review, which they did not have or check before making the improvements.
After some research I discovered their substantial capital improvements encroached onto 3 other owner's properties. We would not be able to get clear title insurance and a loan unless those encroachments were negotiated and purchased from the other property owners. We had a $30 million dead deal that could be held hostage.
Hostages? Oh yes it's become that serious.
The project my clients wanted to purchase we priced at $30M. The other properties they encroached on were worth about $16 million and belonged to other major developers and famous business owners in the city. The other owners have no inclination to sell, but to hold and develop these properties as the area grew hotter. With my buyers in a situation that now required them to purchase the additional properties because of the encroachments to purchase their existing property, the budget and degree of complexity just went to a much higher level. We were now dealing with 4 sellers, any of whom could hold the deal hostage should they not agree to negotiate or decided to escalate into a legal battle.
My clients did not get the property because of the encroachment conditions they created on the other properties could not be resolved. One of the property owners that was encroached upon demanded the improvements be demolished off their property within 90 days. Another property owner demanded 3 times the market value for a portion of their property for the encroachment area. We determined part of the parking lot expansion was built over a drainage easement that needed to be resolved, to prevent flooding in the area and onto surrounding private property. Another property owner that was encroached on realized my client encroached on almost half of their property. So they demanded 10% equity ownership of my buyer's business with the land sale. Well only 3 of 4 owners wanted to sell, and the prices demanded were too much for any lender to consider.
My clients ended up moving out of the building when their lease expired to another location I found them as a contingency. However a lawsuit from the building owner followed them because of the easement and encroachment issues they created while the tenant improved the building. I would say the building owner was also to blame, because they authorized the improvements but that is a seperate argument. Professionals such as commercial real estate agents were not consulted. Construction companies were hired to do the work, and kept their mouths shut to make a buck. The lawsuit it wrapping up now a year later, and it will be interested to see how it is all resolved.
Some people may think about how this only applies to commercial properties. However I'm planning a major home improvement project to make a 200 square foot addition to my house, and turns out my new floor plans exceed a building setback line in place on the deed restrictions. I'm going to have to scale back or deal with the city and HOA later.
MIKE WONG 713.935.5800 KW COMMERCIAL
KELLER WILLIAMS REALTY SOUTHWEST
COMMERCIAL | RESIDENTIAL | LEASING | INVESTMENTS | DEVELOPMENT | INTERNATIONAL
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