Whether you’re a new business looking for your first location or a property investor with an established deal team, every commercial real estate transaction requires due diligence and asking the tough questions. When entering into a deal that may have profound financial (and other) implications for your company, you don’t want to leave any stone uncovered.

First, Put Time on Your Side
Taking your time to review all documents for red flags, particularly surrounding valuations, rents, title, and tenants will pay dividends down the road. This is not something you want to rush. Most real estate investors try to allot at least 30 days for due diligence.

Affording enough time for diligence in commercial real estate deals is particularly important. In contrast to residential real estate, which has various laws to protect the consumer, commercial real estate has fewer protections. Judging a particular property is the responsibility of the purchaser. Proper due diligence helps with this. When done correctly, the purchaser will be aware of all the property’s material facts and defects.

Get the Right Team
Even savvy real estate professionals know that help is required in the due diligence process. Engaging attorneys and other experts after signing a contract will ensure a thorough investigation of a property.

Every property will have its own unique needs based on type and location. However, all due diligence begins with the title search and acquisition of a filed survey. An acquisition team will review these documents.

A title attorney will be looking to see if there are any title defects. The property’s title policy stipulates all collateral that falls under the owner’s authority. Often, both internal and external counsel are consulted to safeguard against a cloud on the title.

A survey report provides a more in-depth understanding of the property. This will include clarification on access rights that adjacent landowners may have, boundaries of the lot as identify required setbacks. At this time, the purchaser should also confirm the site’s zoning designation to ensure it is in alignment with the company’s plans.

Next, Check the Cash Flow
Financial due diligence is an essential step in ensuring that the income and expenses match what the seller has represented. This is a very comprehensive look at a property. This type of checking is usually done as a series of audits, which include:

Lease audits. These are often complicated processes and require the comparison of the lease to the rent collected. It should include the review of move-in, move-out dates, agreed-upon rents, renewal options, security deposits, and other additional charges like whether those for common areas are being appropriately billed.

Contract audits. Understanding the agreements that the property has in place provides insight into operational expenses. It’s also an excellent time to see if other providers may offer more cost-effective solutions. Contracts often include cable and Internet providers, landscaping/snow removal services, office equipment services, technicians, and third-party maintenance providers.

Rent roll analysis. This provides insight on termination, renewal, or relocation options that might be associated with tenants. This enables the purchaser, for instance, to appropriately weight expiring leases against the opportunity to increase rental rates during times of high demand.

Cost analysis. A look back at historical operating costs can provide insight on what expenses should be expected moving forward. Hopefully, this analysis reveals opportunities to save money. For instance, is the property overpaying staff?

Market analysis. This piece provides insight into how a property can be marketed. By looking at comparable, local competitive properties, future rents can be determined, or decisions can be made about making value-additive investments.

Insurance audit: If a property has had a recent claim or is named in a lawsuit, this can significantly affect premiums. It may also hurt a property’s marketability, depending on the nature of the claim.

Taxes analysis. Tax authorities will take the occasion of a sale of a property to reassess taxes based on the new sale price. As might be expected, taxes almost always go up, and the buyer needs to test how that new assessment will affect the property’s overall financial picture.

Beyond the property’s financial picture, there are many other areas to look at, like physical components of the property, environmental assessments, and infrastructure studies. Looking to the 2021 there will likely be new considerations.

As stated above, the best advice with due diligence is to start early, ensure you’ve contracted for enough due diligence time, and work with a qualified team of professionals experience in these activities.