Commercial Real Estate Due Diligence Process –What You Should Be Checking

Commercial real estate is extremely different than the purchasing of residential real estate. According to CRE Online, commercial real estate value is determined in an inverse proportion to the degree of risk inherent to the continuance and stability of the income stream from the property. Also, with commercial real estate, you are putting much more money and risk into properties compared to that of what you spend on residential real estate.

Due diligence really starts the moment you are interested in purchasing a property. Usually, the first step is a site visit and discussion with all parties involved. Also, make sure that the seller fully understands what you are going to be asking for before the deal is signed. So, you need to provide the seller ample time to get all the required documents together.

If you ask any commercial real estate professional, they will usually say there are a few key items that are considered “must need.”  Some will break it down as to what is needed by using a preliminary due diligence checklist and comprehensive due diligence while others break it down by category: tenant information, operating information, building information, and miscellaneous information. There is no one way to collect documents, just be sure that you have collected enough to make a solid decision about the property.

Looking at these 2 different way, a preliminary due diligence would include documents such as:

  • Balance sheet of at least 3 years
  • Financial records of at least the past 3 years
  • All Existing Loan Documents: including notes, deeds of trust, closing statements, title policy, rate riders, etc., and contact names and numbers.
  • Copies of all recent appraisals, engineering reports, environmental reports
  • Utility bills
  • Insurance

A comprehensive due diligence entails what is needed before closing so documents such as engineering inspection and survey, environmental inspection and survey, financial audit, property tax verification, mortgage estoppel letters, and tenant estoppel letters fall under this category.

Now, if you look at it by breaking it down in four categories, these are some of the documents you would have under each section:

Tenant Information Operating Information Building Information Misc. Information
Rent Roll Financial Statements Plans and Reports Licenses, permits and approvals
Copy of All Leases Utility Bills Roof Reports Existing Loan Docs
Financial Statements Schedule of capital expenditures Environmental Reports Recent Title Survey
Leasing Status Report Owners’ insurance policies Mechanical Systems Reports Seller’s policy of title insurance

 

CRE Online, states that the end result of a thorough due diligence process is that when the time comes to present your deal to either partners, investors, lenders, or another buyer, you will have the level of information and knowledge surrounding the property that very clearly states that you are a professional at what you do.

Or as Louie Cardwell, Vice-President Director of Multi-family Acquisitions at First Capital Advisors, sums it up, “Document, disclose, and be on time.”

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