The Important Steps of Due Diligence for Buying Commercial Real Estate
A crucial step in your construction project is completing due diligence before purchasing commercial real estate. But what is due diligence? And what’s required in the process?
Let’s walk through the steps of due diligence for a commercial real estate transaction.
What is due diligence?
Due diligence is the process of investigating, analyzing, and researching before entering into a business transaction, investment, or other decision-making process.
You’ll review any relevant documents like contracts, financial statements, or legal documents. And you may also conduct interviews with key stakeholders, visit facilities, or gather other information (depending on the type of transaction).
Through due diligence, you’ll verify the accuracy and completeness of the information you’ve been provided. But also identify any potential risks or liabilities of the transaction.
Your goal is to have enough information to make an informed decision about proceeding with the transaction.
What are the steps of due diligence for buying commercial real estate?
There are several steps you’ll take to complete due diligence before buying any commercial property.
Preliminary assessment
A preliminary assessment will be conducted to review marketing materials, property information, and other available information or data to understand if the property meets your investment criteria.
Financial analysis
A financial analysis will review information like income & expense statements, rent rolls, or tax records. The purpose is to assess the financial performance and potential returns on the commercial property.
Physical inspection
A physical inspection of the property will identify any physical defects, deferred maintenance, or other issues that can affect the value of the property.
Environmental assessment
An environmental assessment assesses the real estate for any potential environmental risks or liabilities (like contamination) that can affect the value or your ability to develop the property.
Legal review
A legal review is a review of title reports, surveys, leases, and contracts to identify any legal issues or liabilities.
Market analysis
An analysis of the local market conditions helps assess the property’s position in the market and potential future growth. The analysis can include supply & demand, rental rates, vacancy rates, and other relevant data.
Closing & post-close activities
Closing and post-close activities help prepare the transaction for closing by negotiating the purchase agreement, obtaining financing, and addressing outstanding issues or contingencies.
How can an owner’s representative help with due diligence for a commercial real estate transaction?
Having an owner’s representative working with you at the beginning of your construction project is a big benefit since they can aid you during the due diligence process.
Completing the due diligence for your commercial real estate transaction can be cumbersome. But an owner’s representative can take on these responsibilities for you.
Here are a few ways an owner’s rep can help during the due diligence process:
They can coordinate and manage the entire process by working with your lawyers, engineers, inspectors, and other consultants to ensure all tasks are completed and within budget.
They can assist in the selection and management of vendors (like environmental consultants, engineering firms, and appraisers) to make sure they’re qualified, reliable, and cost-effective.
They can help analyze the property’s financial performance and review financial documents.
They can help with the physical inspection of the commercial property by working with the architects, engineers, and other experts to identify any deficiencies or issues.
They can help review and analyze legal documents related to the property.
They can serve as a liaison between you and the other parties involved – like brokers, attorneys, and sellers.
Due diligence is an essential step before signing a contract to buy commercial property.
Because you need to know if you’re making the right choice for your investment. And an owner’s representative can help guide you through this choice.
Having The Common Area as your owner’s representative, we can advocate for you and protect your interests during due diligence and every phase of your construction project.