The due diligence period is critical for a successful CRE investment. After signing a purchase or sale contract, it’s your responsibility as a buyer to inspect, explore and analyze. Correctly done, this important step can mean you either make money or lose it.
Reviewing information can confirm the original terms of the deal or provide leverage to renegotiate. Either way, it’s essential for proper decision-making. The following four types of due diligence can help ensure the property is the right deal for you:
• Physical and Structural
A property condition assessment with a qualified professional (building engineer or property manager) provides necessary physical and structural information. Full property inspections report structural integrity, including electrical, plumbing, HVAC, roofing, elevators, structural walls, waterproofing, pavement, ADA compliance, fire safety, etc. You’ll have a better understanding of what improvements, renovations, and repairs are needed and balance those against the investment opportunity.
• Legal and Title
Legal and title due diligence ensures the seller has the authority to enter the transaction, and there are no liens from unpaid taxes, easements, or charges. This search will also show any outstanding permits that may be out on the property, but it is best to check with the city. With the help of a CRE lawyer, accountant, or business advisor, review the title, ALTA Survey (detailed land parcel map), and zoning compliance. Legal and title due diligence is often required by financial lenders prior to transaction approval. If you find title issues, the seller must eliminate the encumbrances.
• Financial and Operations
To be sure the property will be an asset rather than a liability, review all property financial statements. These include historical cash flow statements, vendor contracts and liabilities, property taxes, rent rolls, and lease terms. You may also want to interview primary tenants. Hopefully, you’ll uncover potential future profit and tax benefits from ownership of the property.
Potential risk of contamination is unveiled during environmental due diligence. Get your hands on a Phase 1 Environment Site Assessment (ESA) to review past and present operations and uses of the property and evaluate potential risk of contaminated soil and/or groundwater. An ESA is a legal and technical investigation and follows state and federal environmental laws. The seller may have already have an ESA, but if not, you need to be sure commission it.
The due diligence period for a commercial property typically lasts between 30 to 60 days. Here are my five tips to keep in mind when you are in this step of your investment process.
If you think a property might work, start the process. Get it under contract ASAP and work through the due diligence types. In this market, you want to avoid “analysis paralysis.”
It’s up to you to examine, judge, and decide if the deal works for you. However, get the right people on your team with expertise in the CRE market. Have realistic expectations and know that your decisions should be guided by the current market. Sometimes listening to an opinion from someone who hasn't been through the entire search process can be problematic.
Each deal is unique. Be thorough and look at details. Cutting corners may cost you in the end. Due diligence is an intricate step and should be handled as such.
Think long term. Make sure the property type matches your overall investment strategy. Also consider, if you sell your business you could lease the property at current rates and still get an excellent cash-on-cash return.
Prevent additional costs at closing. Make sure all tax issues are resolved and be sure all permits, utility bills, executed maintenance contracts, etc. are settled.
Due diligence is a way to limit post-transaction surprises. Investors should leave no stone unturned and use every possible resource to make sure the deal is the right one. I’m here to help if you have any questions (612-788-1552 or jeff@CEGspaces.com).
Jeff Salzbrun is the owner and broker of Commercial Equities Group (CEG). As a veteran-owned real estate brokerage, CEG has been involved in many sale and lease transactions, ranging from single offices to 250,000+ square foot buildings. At CEG, we get your deal done. We know space, and we know the CRE business.
#CommercialRealEstateBroker #broker #CEGknowspace #CEGTwinCities #officespace #industrialproperty #mixeduseCRE #commercial #commercialproperty #MN #twincities #CRE #twincitiescommercialrealestate #MNbusiness #CREinvesting