Paying Attention to Permits and Approvals

[This article originally appeared in the New England Real Estate Journal, September 5, 1997.]

Buyers of improved commercial real estate justifiably concentrate on ensuring that the acquisition makes sound business sense, that the property is not subject to any liabilities such as title defects or environmental hazards and that it is properly conveyed. Often, not enough attention is paid to whether all federal, state and local permits and approvals necessary to successfully operate the business are in place until after the closing. As a result, buyers sometimes find themselves lacking critical regulatory approval for the day-to-day operations of the business.

To avoid this result, a prospective buyer should gain a working knowledge of the types of permits necessary to run the business or use the property before executing a purchase agreement. Permits which are transferrable should be identified in the purchase agreement and then incorporated at closing in the Bill of Sale or other appropriate transfer document.

For permits which do automatically transfer with a change in ownership, the buyer should coordinate with the proper regulatory body well before closing to obtain new permits. For example, if the business includes a food service establishment, the buyer should coordinate with the state Department of Revenue Administration to obtain a Rooms and Meals Tax Operators License and from the local health officials to obtain a Food Service License. The local fire department or fire marshal’s office should be contacted if a new Permit of Assembly is needed. If the business sells alcohol on premises, the buyer should arrange with the Liquor Commission to ensure that a new liquor license is issued simultaneously with closing. If the business maintains an outdoor sign near an interstate or federal highway, a new permit may be needed from the state Department of Transportation. Similarly, although driveway permits run with the land and do not have to be reissued, if the new owner intends to change the driveway or intensify the use of the property, a new driveway permit should be sought from the state Department of Transportation.

Other types of permits require action immediately after closing. For example, the state Department of Labor should be notified upon a change of ownership so that new elevator and boiler certificates can be issued. Other permit requirements may apply depending on the type of business and its location.

For each new permit, the buyer should expect to incur some fees. Also, for many permits, inspections will be required. Proper timing and coordination is critical so there will be no interruptions in the business operations. Furthermore, for each of these permits, it is important that the buyer give thought to the specific entity which will be holding the permit. In many cases, it makes sense to use an operating company, rather than the landowner, to hold the permit. This determination should be made early.

Buying improved commercial real estate is complicated. Buyers should not overlook taking the steps necessary to ensure that all federal, state and local permits and approvals are in place from the moment the new owner assumes control of a particular business. With so much at stake, proper advance planning and information gathering is critical to a smooth and successful business acquisition. Moderate investment in a team of experienced professionals can result in substantial long term savings.