Commercial real estate operates very differently than residential property when it comes to assessing its value. There are more variables to examine, and often more legal conditions. This is where due diligence comes in – you have to make certain not to overlook any details. Verify everything about your property. This includes doing research on local markets as well as local absorption rates. Get and verify information on the sales prices of comparable properties to make sure that you're getting a good deal.
In addition, it's vital to speak to local officials about the legal requirements of the area. If the zoning laws will not permit the use you have planned for the piece of commercial real estate, you could be up a creek without a paddle. Likewise, find out how long it will take to get the right clearances and paperwork through for that use. There are a number of different problems that might crop up over the course of time. These include environmental issues, failure to obtain all necessary permits, and lack of approvals for the intended use. Avoid these by checking and rechecking requirements for the piece of land.
Make sure that the property is what you're expecting. It might not be in the kind of condition you'd like, or the seller may have misrepresented it. Find out how much, if any, repair is needed to get the property operational. You may find that only some of the land you are buying is useful for your purpose. Verifying that you will have enough is very important.
Remember that due diligence begins when you start negotiating. Check with the seller to make sure that they are willing to agree to your terms. Many sellers will balk at a proper due diligence list, but most will eventually return to the bargaining table. A seller may not be comfortable allowing you to look at personal business related documents, but this is vital for making certain you have done everything correctly.
When you negotiate your contract, it's important to provide enough time to examine all the details and recheck your facts. Thirty days or more after the delivery of all necessary documents is common. One good thing to include in an agreement is a statement that you must specify in writing that due diligence is satisfactory and complete, or you will not be obligated and will be able to get your deposit returned. Requiring your written acceptance makes sure that you control the deal.
In addition to hiring professionals to inspect the building's physical condition, it's important to make sure you look over every document that concerns the property and the operation thereof. This means that you have to look at leases and all modifications of them, including extensions. Most leases have peculiar specifications included that the original owners may have forgotten about. This can include unexpected expenses or sources of income – from a tenant, for example. You must examine mortgages, even if you are not assuming them.
If a certificate of occupancy, title or insurance policy, license, or tax receipt is involved, you need to request these from the seller. Likewise, look at all contracts with maintenance people, parking lot providers, and other service providers – if you're not careful, you could find yourself bound to a contract you're not prepared to honor. Read every word of an official document, mark anything you have questions about, then have someone else do the same. Do this multiple times if necessary, to be sure that you have all the information on the property's legal obligations and terms.
Insurance documents can also provide a good deal of information, not just on the obligations of the property, but on the structures themselves. Insurance inspectors can provide their estimation of what may go wrong, and a claims history lets you know what has happened in the past, including a number of repairs. If the seller has recently changed insurance companies, consider it an increase in risk to you.
If your seller doesn't have all this information, you've gained the chance to bargain. A property that was a good bet has just become riskier. You can either back away, or, if you're prepared to take a chance, bring this up as a reason that you require a discount on the property's price. You may find that the seller is able to find the “lost” records suddenly, and if they can't, you get a better price.
Of course, at the end of the due diligence process, you will often find that you're missing some information. This is unavoidable. The most important thing is having enough information to present to investors, partners, and lenders so that an informed choice can be made. Performing due diligence permits you to mine that data which is so important to the success of a commercial real estate project. Without this kind of careful analysis, you could end up paying too much, or getting a property that's so entangled in legal problems it becomes useless. Due diligence is an important way to protect yourself when you make a commercial property deal. No one can ask all the questions that need answering, and sometimes those facts are nowhere to be found. However, you can certainly make headway. Protect yourself and your firm by verifying all pertinent information, then checking it twice.
About the Author:
Tony Seruga, Yolanda Seruga and Yolanda Bishop of http://www.maverickrei.com specialize in commercial and investment real estate. As of May, 2006, they and their partners are managing over $600 million dollars worth of new projects.
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