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A Complete Commercial Real Estate Due Diligence Guide

By May 6, 2024No Comments

Complete-Guide-for-Commercial-Real-Estate-Due-Diligence

At a staggering 5.9 million, commercial buildings in the country occupy over 97 billion square feet and attract the highest number of investments. So it isn’t surprising why commercial real estate due diligence is one of the most searched terms among big-ticket investors, standalone buyers, and even prospective tenants.  

After all, thorough due diligence goes a long way to protect investments worth millions or even billions of dollars. 

You see, pre-investment due diligence can be something as simple as commercial property inspection. However, it can bring enough clarity about the building’s existing state before you commit to a purchase or investment contract, thus eliminating potential risks. 

Now, if you’re wondering what commercial property due diligence is all about and how you can go about one, you’re at the right place.

Read on, as I’ve discussed everything along with my own insights as a building inspection expert

What is due diligence in commercial real estate? 

Let’s start with the basics first and understand what is due diligence in real estate transactions. 

Due diligence, at its simplest, involves carefully assessing each and every aspect of a property before you buy it. And this includes the property’s condition, financing, existing rent rolls and leases, seller’s background, etc. 

Apart from this, you might also have to acquaint yourself with the local zoning laws and potential legal obligations that the property might carry, among others. 

The idea behind due diligence in real estate is simple: You should have complete information about any detail that was not available during the property’s valuation. That’s because such details might point to an expensive mistake that you’d be making by going ahead with the transaction. 

Think of it as an essential exercise that can protect you from losing hundreds of thousands, if not millions, in a real estate deal. 

Why is commercial real estate due diligence so important? 

Now that you know what due diligence in commercial real estate is all about, you might well be wondering why it is so important. 

Well, as I said, the idea behind a due diligence exercise is to avoid costly surprises after you’ve purchased a property. 

For instance, let’s say you purchased a property about a year ago, and some serious environmental hazards are now revealed. In this case, you’ll have to undertake a complete decontamination which can cost you thousands of dollars. 

Worst, you might face a hefty fine by the authorities on top of the decontamination. 

It is post-purchase double whammies like this that a due diligence real estate audit can save you from. 

On top of that, due diligence will also ensure the existing owner provides all such essential documents that might not be available to you otherwise. 

All in all, here there are three reasons why a due diligence inspection for commercial real estate is essential: 

  1. It depicts a clear picture of the risks involved in the investment. 
  2. It allows you to calculate estimated returns from the property.
  3. It offers an opportunity to renegotiate the purchase deal with the existing owner or seller. 

Commercial real estate due diligence checklist: What should you do before purchase? 

A due diligence checklist for commercial real estate covers everything from assessing relevant documents to getting the property inspected and more. 

Overall, here’s a real estate due diligence list that you should follow before finalizing a purchase:

#1. Collect and analyze all property-related documents 

The first step in real estate due diligence is to gather every single building document available. 

Here’s a list of documents you can request the existing owner to provide: 

  • Property surveys
  • Government documents
  • Lease documents 
  • Pictures of the property, including photos of aerial survey (if available),
  • Property title 
  • Tax reports 
  • Zoning documents 
  • Construction paperwork 
  • All available property condition reports (look for the latest assessment reports) 
  • Environmental record 
  • Records available with the building department 

Having sourced all these documents, it’s time you start analyzing each and every document at your hand. 

Herein, it is essential you understand all the terminologies in detail. Also, if required, you can seek assistance from a real estate attorney. 

In the end, you should be able to establish whether or not there are potential legal implications or restrictions on the property. 

#2. Get an inspection 

Once you’ve completed analyzing property documents, you should start looking for a building inspection service provider and schedule an inspection. 

The inspector can be an architect, engineer, or general contractor with the required building inspector license. And they will inspect every nook and cranny of the property to find any potential problem areas. 

You see, a building might look perfect at first sight, thus justifying the seller’s quote. However, there are good chances of problems lurking below the surface. 

For instance, I’ve inspected buildings that looked totally alright from the outside but had serious structural, electrical, and other problems. 

So, inspecting the property beforehand will help you understand what exactly is the property’s condition. 

#3. Hire an environmental site engineer 

The third item on a commercial property due diligence checklist is a phase 1 environmental site assessment. Also called a phase 1 ESA, this is carried out by environmental engineers to assess the present and past environmental uses of the property. 

Here, engineers look for potential environmental hazards on the property such as water or soil contamination, the presence of lead or asbestos, etc. This ensures potential contamination is detected at an earlier stage and that you aren’t liable for decontamination or environmental fines as the new owner/investor. 

#4. Learn about potential legal implications 

Although uncommon, I’ve come across properties that were encroaching upon a neighbor’s property. 

Similarly, there are also buildings that are built or modified in violation of the pre-approved plans or building codes. 

So, it is possible that such buildings might already be facing lawsuits. And if not, there are good chances that they could face a legal challenge. 

Now, as the building owner, you’ll become liable for these legal implications. As such, it makes sense to become aware of such legal hurdles beforehand and steer clear of them.

#5. Secure financing 

If the property fits your requirements and passes the above checklist criteria, you should start looking for finance or mortgage options. 

There are plenty of lenders who provide easy financing for commercial buildings. More so if you could convince them of the potential business opportunities from the property. 

#6. Finalize the purchase 

The last step in the real estate due diligence checklist is the finalization of the purchase deal. And this is a pretty straightforward process once you’ve figured out all other pre-purchase aspects. 

Nevertheless, it’s a good idea to involve a real estate attorney during purchase finalization. 

How long does commercial property due diligence take to complete? 

I am often asked by prospective real estate buyers about the estimated time required to complete real estate due diligence. 

You see, the exact time frame will depend on various factors such as property size, availability of documents, etc. However, if all essential documents are available, due diligence for a standard commercial property shouldn’t take more than a few days. 

That said, if any of the documents are missing, the process can take a lot longer and stretch for a period of over a month.

To sum up 

As you can see, commercial real estate due diligence can safeguard your investment worth millions of dollars. 

So, even though complete due diligence requires time, energy, and money, take my advice and go ahead with it.

At the least, you should get a commercial building inspection as this alone can help you get an inside-out picture of the property. 

Wondering how you can go about a property inspection?

You can get in touch with us!

At Intercoastal Inspections, we are seasoned property inspectors providing top-notch inspections across Central and Eastern Florida. And we’ve got all your inspection requirements covered on a budget.

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