Despite a steep downturn in mid-2020, demand for retail centers, shopping centers, and all other types of commercial properties suddenly rebounded toward the end of the year.
If you’re looking to buy a commercial property, note that the key information required to evaluate the property can be difficult to uncover. This can significantly hurt the financial merits of commercial real estate transactions. This is when intensive due diligence becomes a necessity.
In this guide, you’ll learn everything you need to know about due diligence in commercial real estate.
What is Due Diligence for Real Estate?
The underlying purpose of due diligence in real estate is to thoroughly assess the fundamentals of the seller, property, compliance obligations, and financing to mitigate financial uncertainties. Property buyers must meticulously examine potential liens, zoning restrictions, and any encroachments on the property. Careful inspection of the existing structures is a must to discover repairs and costs.
Before the purchase contract is signed, well-informed real estate investors emphasize detailed due diligence. They’ll ensure that items of due diligence are carefully laid out in the sale contract.
It’s critical to create a due diligence checklist, considering the extensive documents in commercial real estate transactions. It should help evaluate the risks against the rewards before the deal closes.
How does Due Diligence work in Commercial Real Estate?
The process of due diligence in commercial real estate begins with obtaining a clear understanding of the purpose of the transaction. The aim of the investment in commercial real estate forms the foundation of due diligence.
For example, before someone can acquire an apartment building, commercial retail center, or any other income-generating property, the investor will be required to examine each tenant’s rental payment history and verify the leases of existing tenants. Without this critical obligation, the financial stability of the predicted income stream can be a big question mark.
In contrast, the focus of the potential property owner is on what the building will be used for and whether space can be permitted to be used that way.
Before the transaction can be processed, lenders will typically require an environmental suitability assessment. An experienced environmental engineering agency can help in this regard. It will inspect past uses of the property, collect evidence of potential contaminants such as lead, mold, asbestos, etc.