Due Diligence In A Commercial Real Estate Transaction

In the context of a commercial real estate transaction, a buyer performs certain due diligence in order to unearth issues affecting a property so that the buyer can properly evaluate his/her risk-and, ultimately to help the buyer make an informed decision about whether to proceed with the closing of the deal.

When purchasing commercial real estate, consider completing these items as part of your “Due Diligence”:

  1. Property Inspection- A thorough property inspection by a qualified and licensed inspector is imperative; and the best way for a buyer to discover potentially large and expense repair items.  Certain types of commercial properties may also require further investigation by a specialist, such as an architect, engineer, stucco inspector, etc.
  2. Review Documents- Buyers often fail to take the time to review key documents that shed insight into the condition/operation of the property.  Buyers should always take the time to review current leases, past inspection reports, construction permits, zoning approvals, surveys, drawings, rent rolls, building plans, environmental reports, operating budgets, code enforcement letters, etc.
  3. Environmental Testing– A Buyer should consider conducting Phase I and, in some cases, Phase II environmental testing–especially, if the property is of a type in which hazardous materials are used/stored or is located in close proximity to where such materials are used/stored. Many lenders will require a Phase I environmental study as a condition to providing financing.
  4. Pay Attention to Timing– You need to allow for enough time to complete all testing and document review; make sure to negotiate a big enough time period in the Agreement of Sale to complete all due diligence needed to properly evaluate the risks of moving forward in the transaction.

Part of making a smart real estate investment is gathering as much information about a property as possible and minimizing your exposure to expensive repairs.

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