Due Diligence Checklist for Commercial Property Buyers

by | Mar 13, 2024

Investing in commercial real estate can be an exciting venture, unlocking doors to long-term wealth and business growth. However, before diving headfirst into any deal, meticulous due diligence is crucial. Think of it as building a bridge to informed decision-making, mitigating risks, and avoiding costly surprises down the road. As real estate attorneys, we are here to equip you with a comprehensive checklist to help you navigate the due diligence process with confidence.

Property Fundamentals

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Title and Encumbrances:

  • Obtain a recent title report revealing ownership history, potential liens, easements, and other encumbrances.
  • Review surveys to verify property boundaries and potential encroachments.
  • Verify zoning compliance and any restrictions impacting your intended use.
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Physical Condition:

  • Conduct a thorough property inspection by qualified professionals, covering structural integrity, mechanical systems, and environmental concerns.
  • Review maintenance records and identify necessary repairs or capital improvements.
  • Ensure compliance with building codes and accessibility standards.
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    Environmental Concerns:

    • Order a Phase I Environmental Site Assessment (ESA) to identify potential hazards like hazardous materials, underground storage tanks, or soil contamination.
    • Depending on the ESA findings, further Phase II investigations may be needed.
    • Understand potential remediation costs and regulatory liabilities.

    Financial Analysis

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    Financial Statements and Tax Records:

    • Review operating statements, rent rolls, and tax returns for the past several years to assess income, expenses, and historical performance.
    • Analyze vacancy rates, tenant creditworthiness, and lease terms.
    • Verify tax assessments and potential special assessments or tax liens.
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    Pro Forma Projections:

    • Develop comprehensive financial projections based on realistic occupancy rates, rental income, operating expenses, and potential capital expenditures.
    • Consider various economic scenarios and assess the property’s resilience under different market conditions.
    • Understand the impact of financing costs and debt service on overall profitability.

    Legal Considerations

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    Purchase Agreement and Leases:

    • Carefully review the purchase agreement terms, including closing costs, contingencies, and representations and warranties.
    • Analyze existing tenant leases, paying close attention to renewal options, rent escalation clauses, and potential defaults.
    • Negotiate terms favorable to your investment goals and risk tolerance.
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    Governmental Approvals and Permits:

    • Verify all necessary permits for current and intended use are in place and compliant.
    • Identify any potential zoning changes or variances required for your planned operations.
    • Research potential government regulations impacting your business or development plans.
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    Pending Litigation and Liens:

    • Conduct a thorough title search to uncover any pending lawsuits, judgments, or liens affecting the property.
    • Understand the potential impact of ongoing litigation on the transaction and your legal rights.
    • Negotiate appropriate risk allocation clauses in the purchase agreement.

    Additional Considerations

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    Market Analysis:

    • Conduct thorough market research to understand the local demographics, economic trends, and future projections for your chosen location.
    • Analyze competitor activity and assess the demand for your intended use of the property.
    • Identify potential risks and opportunities associated with the surrounding market.
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    Site Visits and Interviews:

    • Conduct on-site visits to assess the property’s condition, surrounding area, and accessibility.
    • Interview tenants, neighbors, and local authorities to gather insights about the property, the neighborhood, and potential concerns.
    • Gain valuable qualitative information that may not be captured in reports and documents.

    Seek Expert Guidance

    Investing in commercial real estate can be a rewarding experience, but navigating the due diligence process shouldn’t be a solo adventure. Before you even begin, it is a smart move to assemble a team of qualified professionals, including a commercial real estate attorney, to guide you through the due diligence process. Leverage their expertise to interpret complex documents, identify potential risks, and negotiate favorable terms. Remember, seeking expert advice can save you time, money, and costly missteps in the long run.

    By diligently following this checklist and collaborating with skilled professionals, you can transform due diligence from a daunting task into a valuable tool for making informed decisions and securing a successful real estate investment.

    Remember, this checklist serves as a general guide, and specific requirements may vary depending on the property type, location, and your business objectives. Consult with a commercial real estate attorney at Sayer, Regan & Thayer for help in tailoring this checklist to your unique needs.

    This blog is for informational purposes only and does not constitute legal advice. Please consult with an attorney for personalized guidance on your specific situation.