In commercial real estate, you are usually purchasing an investment for several million dollars. This makes the due diligence process incredibly important. You need to give yourself an opportunity to conduct serious due diligence on the isolated asset. At our firm, we have over a 100 point due diligence checklist of documents and items that need to be reviewed and cleared before we can close.
No matter what the seller demands, it is important that you thoroughly understand the asset you are purchasing before your deposit goes hard. We can typically move through a due diligence period on certain assets in less than 7 days, but many times we request 30 or 60 days. I won’t go through the entire checklist here, because the list is long, but to give you a little insight: What service contracts are in place? Are there any encumbrances, easements or special assessments on that property? Have you reviewed the lease documents for existing tenants? Are the security deposits in place? Have you reviewed local zoning ordinances? Have you done a lien search and a title search? What is the current title insurance policy? The list continues, but you can see it’s very involved.
Prioritize and then clear the potential major issues first, then move down the line in order of importance.
We Always Start With The Numbers
For any real estate investment, financial information is the most important. We are purchasing an asset based on a certain amount of Net Operating Income, so we need to make sure the rent roll and operating expenses we were told is correct.
Next, We’ll Look At Environmental Issues
An environmental issue can wreck an entire deal, so we always want to clear that immediately. An environmental site assessment will be needed to make sure that you won’t run into any major issues. Review any environmental reports that the seller may already be able to provide. Phase I and Phase II Environmental site assessments can be pricyThe environmental This includes a tank sweep.
We’ll Then Analyze All Leases
When you purchase a commercial property with tenants in place, you are likely to adopt a lease that you didn’t review before it was signed. You need to make sure there is no potential detrimental language in the lease terms.
We’ll Then Move Along To The Major Operating Systems
Roofs, large HVAC units, and any major deferred maintenance. we’ll look into any of the big-ticket items.
From that point, we continue down the line until we are satisfied, or feel we need to go back to the seller for certain concessions. While it is in-depth, It’s also straightforward, and it’s an incredibly important part of the transaction process when major dollars are on the line and you anticipate holding something for multiple years.