Whether buying land during the commercial real estate development process or buying real estates, such as a net lease investment or a regional shopping center, conducting due diligence should always be a thorough, intricate process.
Furthermore, no two transactions are alike. Discipline is required to unlock value in commercial real estate. The preliminary due diligence and underwriting, on the other hand, are critical components to ensuring a positive ROI.
While not exhaustive, here is a helpful list of the main items to cover during commercial real estate due diligence to avoid costly mistakes.
DUE DILIGENCE
Due Diligence Preliminary
This first stage of the due diligence process may appear less important, but it is far from it. Addressing the “low hanging fruit” early on will eventually lead to identifying specific key performance metrics when in-depth analyses are required.
ITEMS:
- The most recent title policy (with any related documents)
- Topographic and ALTA surveys
- Architectural, engineering, as-built, and other construction plans
- Environmental reports (if applicable, Phase I and Phase II) and any others
- Report on Property Condition
- Inventory of any personal property on the premises
- List of permits, certificates of occupancy, warranties, government notices, special assessments, code violations, and guaranties that are still outstanding.
- Any pending legal action affecting the property
- Property tax bills from the previous three years, including special assessments or incentives
- Utility bills from the previous two years
- Current insurance policies (and any claims)
- Alternative medicine recommendations
- Verification of capital expenditure expenses
Underwriting
This stage of the due diligence process entails a more in-depth investigation of the prospective property. This study period, or feasibility determination, can typically last 30 days or more.
ITEMS:
- Legal definition
- Certificate of Zoning Compliance
- Being aware of any liens
- Encroachments
- Appraisals
- Covenants, terms, conditions, limitations, reservations, and easements
- Credit-rating tenant profile(s)
- Tenant lease(s), including any amendments and abstracts
- SNDA(s)
- Rent roll, including CAM, security deposits, and tenant-paid real estate taxes
- Site inspection (critical)
- Tenant screening (s)
- Interviews with local governments
- Demographic studies
- Quick competitor analysis
- Sales data comparable
- Lease data comparable
Analyze cash flow (typically evaluate on a 1,3,5, and 10-year hold scenario)
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