At a glance:
- Financial due diligence: Review financial statements and analyse operating expenses.
- Legal due diligence: Review property title and lease agreements, and verify compliance with zoning and regulatory requirements.
- Physical inspection: Conduct a thorough assessment of the property’s condition and functionality.
- Market analysis: Research local market conditions, rental rates, and potential growth opportunities.
Are you planning to invest in a commercial property? Congratulations! This is a significant step towards growing your business or investment portfolio. However, before you sign on the dotted line, it’s crucial to conduct due diligence on the property.
Due diligence involves investigating the property thoroughly to ensure it meets your requirements and to avoid any costly surprises after you purchase it.
We have created a comprehensive checklist to guide you through the due diligence process when purchasing a commercial property. Read on to discover essential steps you should take to make a sound investment decision.
What is to Due Diligence?
Commercial real estate acquisitions require due diligence. It is a comprehensive and often complex process of verifying and reviewing all pertinent information about the property, including its title, financial records, and tenant relationships. This process is essential for buyers to uncover potential issues or red flags before making a final decision on the acquisition.
The importance of due diligence when purchasing a commercial property
Conducting due diligence is a crucial step that all potential commercial real estate buyers should undertake before purchasing a property. A commercial property due diligence checklist helps investors to fully understand the intricacies of the property and to determine if it offers a positive ROI. This process involves thorough investigation and analysis of various key factors such as title reports, environmental reports, correspondence with governing authorities, leases, rent roll, operating expenses, and capital expenditure items that may need to be addressed in the future.
Financial Due Diligence
Financial due diligence is an essential element of the due diligence process when acquiring a commercial property. It involves a thorough review of financial documents and information related to the property, including rent rolls, leases, tax returns, and utility bills.
Review financial statements and assess cash flow
When conducting due diligence on a commercial property, it is essential to review financial statements and assess cash flow. This involves thoroughly examining the property’s income statement, cash flow statement, and balance sheet to ensure that they are accurate and provide a complete picture of the property’s financial health.
Analyse operating expenses and potential risks
When conducting due diligence in commercial real estate, one important aspect to consider is analysing the property’s operating expenses. This includes reviewing past financial statements, leases, and any other relevant documents to assess the property’s profitability.
Legal Due Diligence
This involves a comprehensive review of all relevant documents, records, and financial information related to the property to uncover any potential red flags. A thorough due diligence checklist should include items such as the most recent title policy, zoning compliance certificate, and copies of all leases and service contracts.
Review property title and lease agreements
Reviewing property title and lease agreements is a crucial part of conducting due diligence when purchasing a commercial property. It is important to obtain the most recent title policy or commitment on the property and all related documents.
It is also important to obtain a true, accurate and complete copy of each written lease & guarantee including any amendments and an accounting of all rents and other income. It is essential to review all covenants, conditions, restrictions, reservations, and easements related to the property.
Verify compliance with zoning and regulatory requirements
When conducting due diligence in commercial real estate transactions, it is crucial to verify compliance with zoning and regulatory requirements. This involves thorough examination of local zoning ordinances, building codes, environmental regulations, and other legal restrictions.
Physical Inspection
During the due diligence phase of purchasing a commercial property, physical inspection is crucial. It involves thoroughly examining the building, its systems, and properties to ensure they are in proper working condition and meet current safety standards. Here, Inspectors and engineers review original plans, conduct structural analysis, and identify any potential issues that might require major repairs.
Conduct a thorough inspection of the property
It is recommended to hire professional inspectors and engineers to assess the physical condition of the property, including the structures, mechanical systems, and environmental factors. The inspection process should also include a site visit with the current tenants, allowing the potential buyer to get a better understanding of the property’s operations and potential issues.
Assess the condition and functionality of the building
This includes examining the functionality of all systems such as HVAC, plumbing, and electrical. A thorough inspection of the roof, walls, and foundation is also important. Any deferred maintenance or repairs needed should be noted and factored into the investment decision. The inspection report should include detailed findings and recommendations for any necessary repairs or improvements.
Market Analysis
Market analysis involves researching and understanding local market conditions, including supply and demand, rental rates, and competition. Investors must also consider demographic trends, economic indicators, and the potential for future growth or development in the area. Thorough market analysis helps investors determine the appropriate price to offer for the property and anticipate potential risks.
Research the local market and industry trends
It allows investors to understand the demand for the property type and potential competition from similar properties. Consider factors such as employment rates, population growth, and income levels in the area. Additionally, analyse the vacancy rates and rental prices for similar properties within the market.
Analyse rental rates and potential growth opportunities
Real estate investors should obtain a rent roll to see the current rental rates and remaining terms on existing leases. They should also research the current market rates in the area and compare them with the current rates of the property. Additionally, investors should look for any upside potential in bringing the rental rates up to current market rates.
Conducting due diligence is a crucial step in purchasing a commercial property, and it requires careful evaluation of financial, legal, physical, and market aspects. By following a comprehensive checklist and investing time in due diligence, investors can mitigate risks and make informed decisions.
When it comes to commercial real estate needs, partnering with a reliable agency is paramount. Axis Property, as a boutique commercial real estate agency, provides expert guidance and assistance throughout the due diligence process. Their team of professionals understands the intricacies of commercial property transactions and can help you navigate the complexities with ease.
Whether you need assistance in financial analysis, legal documentation, property inspections, or market research, Axis Property is dedicated to providing exceptional service and ensuring a smooth due diligence experience. Trust Axis Property to be your partner in making sound investment decisions and securing your commercial real estate goals