Many real estate investors eventually make the jump from residential to commercial properties. While some terms apply to both property types, commercial real estate brings with it a whole new jargon. To succeed in commercial real estate, investors must quickly learn this new language. In particular, site preparation, surveys, and title work often play a larger role in commercial real estate. As such, we’ll use this article to answer the questions: what is an ALTA Survey, and why does it matter?
Specifically, we’ll cover the following topics:
- ALTA and NSPS Overview
- What is an ALTA Survey?
- Final Thoughts
ALTA and NSPS Overview
What is “Title” in Commercial Real Estate
Prior to discussing ALTA Surveys, novice investors need to understand the concept of “title” in commercial real estate.
Simply put, title refers to ownership of property. When investors ask about a property’s title, they generally mean: who owns this property, and does anyone else have a competing ownership claim? More precisely, title refers to the documentation outlining the legal owner(s) of a piece of real property.
In a commercial real estate transaction, title studies play a critical role in deal due diligence. Before closing on a deal, the buyers will commission a title study. This study confirms that the real estate involved in the transaction is, in fact, owned by the seller without competing claims. Related, these studies confirm that the seller has the legal right to sell the property.
If a property lacks clean title history, the seller likely doesn’t have the legal right to sell the property, which will derail a transaction. Two organizations set standards to avoid such an outcome: ALTA and NSPS.
ALTA stands for the American Land Title Association, and it serves as the trade association overseeing all matters related to real estate title. According to published material, “ALTA members search, review and insure land titles to protect homebuyers and mortgage lenders who invest in real estate.” ALTA sets all major title-related standards guiding commercial real estate transactions.
Land surveys relate directly to title. These technical processes detail the land, boundaries, and improvements included in a real estate transaction, helping confirm that reality corresponds with the legal description in title documentation. NSPS, or the National Society of Professional Surveyors, serves as the trade association for American real estate surveyors. This organization sets the standards for survey work so that these reports support title studies.
What is an ALTA Survey?
ALTA Survey Overview and Key Elements
The ALTA Survey represents the gold standard of surveys in the commercial real estate world. These detailed studies provide title insurers – those who insure against any bad title claims – supporting evidence to issue title policies. But, as we’ll outline below, ALTA Surveys also provide key information to potential buyers.
According to industry leader Partner Engineering and Science, Inc., an ALTA survey is “a detailed land parcel map, showing all existing improvements of the property, utilities, and significant observations within the insured estate. The survey also details the licensed surveyor’s findings concerning the property boundaries and how they relate to the title.” Title documentation includes legal descriptions of property, and ALTA Surveys provide assurance that these legal descriptions match the facts on the ground.
While real estate investors can commission boundary surveys, which outline the boundaries of a given parcel, these surveys lack the comprehensive detail of an ALTA Survey. The latter combines the detail and decision-making support of a boundary, title, and location survey into a single report meeting industry standards.
And, these standards are what make ALTA Surveys so valuable. Partner Engineering explains that “the ALTA standards governing the content of all ALTA Surveys […] are denoted in the Minimum Standard Detail Requirements for ALTA/NSPS Land Title Surveys, as adopted by American Land Title Association and National Society of Professional Surveyors.” In other words, when you commission an ALTA Survey prior to a commercial real estate transaction, all parties – lender, buyer, title insurer – know that the associated report conforms to required standards of professional conduct.
Why ALTA Surveys Matter in Commercial Real Estate
Commercial real estate deals often involve a significant amount of money. As a result, investors should conduct thorough due diligence prior to completing any deal. ALTA Surveys provide critical information on the following items related to this due diligence:
- Support title studies: Real estate attorneys heavily rely on ALTA Surveys to conduct their title studies.
- Assist with site plans: When civil engineers and architects develop site plans for a development, they will use ALTA Surveys to access key land and improvement information (e.g. dimensions, utility locations, easements, current improvements, etc.).
- Avoid boundary disputes: ALTA Surveys clearly and accurately depict a parcel’s existing boundaries with adjacent parcels, allowing buyers to know exactly 1) what land will be theirs, 2) where the neighboring parcels begin.
- Confirm existing easements and land-use restrictions: ALTA Surveys also detail easements (e.g. for public access, utility lines, etc.) and existing land-use restrictions. These property characteristics must be accounted for in any development plans.
- Lender and/or insurer requirement: For commercial real estate transactions, many lenders require an ALTA Survey, though some will allow a less detailed boundary survey. Additionally, many title insurers will require an ALTA Survey before issuing a title insurance policy for a commercial real estate deal.
- Confirm current zoning and compliance: Though not a formal requirement, many ALTA Surveys now include a parcel’s current municipal zoning and compliance. That is, if a parcel is zoned for light industrial use, do the existing property improvements meet those requirements? If not, are any violations grandfathered? Buyers want to avoid a situation where, as the new owner, they become responsible for remediating prior zoning violations – a potentially costly undertaking.
Successful commercial real estate investors understand the importance of surrounding themselves with a team of experts, a rule that absolutely applies to surveyors. As an investor, you don’t need to be a professional surveyor, but you do need to understand the importance of ALTA Surveys to any commercial real estate deal.
If you’d like to discuss different real estate investing options for your unique situation, we’d love to chat! Drop us a note, and we’ll set up a meeting to talk about available passive real estate investment opportunities.