What Is an Encumbrance? A Guide for Commercial Property Investors

It's any third-party interest that "rides along" with the property. That might be financial, like a mortgage or tax lien. Or it might be physical or legal, like a utility easement or a restriction in the deed.

In other words, encumbrances are the strings attached to property ownership. Some are temporary. Others are baked into the land, and stick around through multiple sales. If you're evaluating commercial real estate, it's essential to identify these limitations early. They may not prevent a transaction, but they can reshape the risk, timeline, or use case entirely.

Why do encumbrances matter to investors?

When you buy commercial property, you're not just buying the dirt and the structure. You're buying every legal obligation tied to it.

An easement that limits access could derail your site plan. A judgment lien could delay closing. A deed restriction might block the tenant mix you need for income. You can't afford to overlook any of it.

Hypothetical example: the buried easement

Imagine reviewing a mid-block parcel with what appears to be clean title. No red flags from the broker, everything looks promising. But a closer read of the deed reveals a decades-old easement giving a telecom company access directly through the site, right where you planned to build a loading dock.

That kind of surprise can derail a deal overnight.

This is why smart investors pair a thorough title search with title insurance. Missing just one encumbrance can cost six figures in site redesign, delayed approvals, or legal fees.

Big picture: encumbrances don't always kill deals, but they always change them

Some encumbrances are deal breakers. Others are manageable with the right strategy. But all of them impact your ability to develop, lease, finance, or sell the asset.

The key is identifying them early. Before you sign a letter of intent. Before you run cost projections. And definitely before you hand over your deposit.

This is where smart investors separate from speculators. Knowing what an encumbrance is, and what to do with it, can save you time, money, and the occasional courtroom visit.

How do encumbrances affect property value and marketability?

Encumbrances can lower a property's value and make it harder to sell by introducing risk, restrictions, or future obligations.

Buyers want clean, transferable rights. When a property comes with baggage, like unresolved liens, deed restrictions, or usage limitations, it shrinks the buyer pool and drives down offers.

Even common encumbrances like leases or easements can reduce flexibility. That means fewer use cases, longer holding periods, and tighter margins.

Encumbrances reduce investor confidence

If you're trying to sell commercial property, any uncertainty around title or land use makes your deal riskier in a buyer's eyes. Risk equals discount. They'll either walk, or offer 10 to 20% below your asking price to account for cleanup costs and legal exposure.

Worse, unresolved encumbrances can complicate financing. Lenders see restrictions on collateral as threats to repayment. That can limit loan options or drive up rates.

Some encumbrances block highest and best use

Your returns are often tied to repositioning potential. But if an easement cuts through your buildable footprint, or a covenant prohibits redevelopment, that limits what's possible.

This is where understanding a property's highest and best use becomes critical. Encumbrances can prevent you from achieving it.

Valuation takes a direct hit

Appraisers factor encumbrances into every building valuation. Liens, restrictions, and access limitations all reduce the net operating potential or increase perceived risk.

For example, a parcel with a clear path to redevelopment might appraise at $1.2 million. Add a restrictive covenant that blocks rezoning, and that number could drop to $950K overnight.

That $250K difference? It's not theoretical. It's leverage lost, and it will show up in every negotiation.

What are the main types of encumbrances in commercial real estate?

• Liens - Legal claims used as collateral for unpaid debts, such as mortgages or tax obligations. These must be cleared before a sale can close.
• Easements - Rights granted to others to use a portion of the property for a specific purpose, like utility lines or shared driveways.
• Restrictive Covenants - Deed-based rules that limit how the property can be used, often tied to development or tenant restrictions.
• Leases - Active rental agreements that transfer with ownership, impacting operational control and income until expiration.

The table below summarizes how each type affects use, whether it is financial, and if it transfers with ownership:

Each of these categories presents unique risks or limitations. Understanding how they interact with your intended use is crucial before moving forward with a land purchase or commercial development project.

How do you uncover encumbrances before purchasing property?

Start with a title search, but don't stop there.

A basic title search shows recorded liens, easements, and restrictions. But hidden encumbrances, like unrecorded encroachments or historical overlays, require deeper investigation.

This is especially true when evaluating land parcels, which may be affected by access easements, conservation agreements, or zoning overlays not visible in standard title reports.

Review county records, tax maps, and zoning plans. Ask direct questions about encumbrances in writing, and cross-check with a commercial appraisal or updated land survey if anything seems unclear.

Investor tip: Create a due diligence checklist that includes conservation easements, future road plans, and unpermitted structures, anything that could limit your exit strategy or repositioning play.

And always secure title insurance. It's your last line of defense against claims that don't surface until after closing.

If you're currently evaluating land parcels, here are some available listings in your area that may require similar due diligence.

How do encumbrances affect your investment timeline and exit strategy?

Encumbrances can slow you down, and narrow your buyer pool.

Resolving liens, boundary issues, or title defects often adds six to 18 months to your holding period. Even if the encumbrance stays in place, buyers will take longer to underwrite and negotiate around it.

Encumbrance Impact Timeline

Exit plans shift, too. You may need to market the asset to cash buyers, value-add developers, or CRE investment groups willing to work around the constraint.

Investor tip: Before acquisition, model two exit scenarios, one with the encumbrance removed, and one with it still in place. This forces you to build in time, legal cost, and buyer type flexibility up front.

Frequently Asked Questions

How can I calculate the impact of an encumbrance on property value?

Start by comparing similar unencumbered properties to establish a baseline. Then apply a discount based on the type and severity, typically 5-15% for easements, or more for use-limiting covenants. For liens, factor in the full payoff plus any legal costs. When in doubt, bring in an appraiser familiar with encumbered assets.

Which encumbrances are deal breakers and which are manageable?

Deal breakers often include unresolved title defects, court-ordered liens over 25% of value, or use restrictions that block your business plan. Manageable encumbrances include active leases, minor easements, or liens with clear resolution paths. The key is knowing what it will cost to remove or work around it.

What's the smartest way to resolve encumbrances post-purchase?

Start with liens and legal claims, they're the fastest to resolve and deliver the biggest lift in value. Next, tackle encroachments or easements through neighbor agreements or legal action. If covenants block value-add plans, consider applying for a zoning variance or working within the restriction.