What is Due Diligence in Commercial Real Estate (CRE) ?
Due diligence is the process of obtaining and verifying all information related to a specific property. This investigation should include a wide variety of professionals including a commercial real estate agent, commercial lawyer, tax lawyer, appraiser, environmental assessment company, contractor, lease abstractor, accountant, insurer etc.
On the buying side, due diligence is done after submitting a formal written offer.
When buying commercial real estate the purpose of due diligence is to:
Determine and minimize risk
Assess value by reviewing all information and circumstances
Gain leverage for price negotiations
Assess potential upside opportunities
Discover all details about the property before being legally binded to purchase
Have time to ask the right questions to fully understand property, tenants etc.
No post-transaction surprises
On the selling side, due diligence may be done both before and after an offer is accepted.
When selling commercial real estate the purpose of due diligence is to:
Know all upside opportunities and price it in, eg. rezoning/development potential
Determine downsides, such as high vacancy rates or a contaminated site
Determine strengths, such as leases up for renewal at much higher market rates
Prepare document package the buyer will ask for ahead of time, speed up process
Assess the quality of purchaser(s)
The due diligence process in commercial real estate is much more involved versus a simple residential purchase. In residential we usually have subjects to: financing, inspection, insurance, strata document review and often some environmental components like an oil tank scan.
However in CRE there are a multitude of subjects above and beyond the ones above, depending on the nature and complexities of the property. The information is often scattered, unreliable or not easily available. Potential purchasers or sellers may need to get specialized inspections before subjects are removed. This could include phase 1 or 2 environmental assessments, a property condition and assessment report, roof report etc. It is extremely important investors hire the right professionals to get the answers they need prior to the deal going firm. If the due diligence process is not done correctly the results can be costly.
As a commercial real estate advisor and consultant, my role is to introduce you to investment opportunities, shepherd you through the purchase process, ask the right questions, mitigate risk and maximise upside potential. I stand by you throughout the due diligence process and dive into the details so there are no surprises later on.
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