Due Diligence
Due diligence exists to determine if the site meets your investment and development criteria, and Cullina Management llc understands that the timeline to do so is critical, drawing from 35 years of success in helping our clients achieve this goal.
In commercial real estate, due diligence is the act of thoroughly inspecting every aspect of a property, seller, financing, leases, rent roll, easements and more before you purchase the property. Some factors to consider include zoning laws, neighborhood, possible liens, legal liabilities on the property, violations or needed repairs.
It’s best practice to complete due diligence before any contract is signed to ensure there aren’t any surprise issues with the commercial property you’re about to purchase. One way to ensure you’ve done your due diligence is by creating a due diligence checklist.
That said, the steps involved with due diligence might vary, depending on the type of property and the goals of that property. For instance, if you purchase an apartment building, due diligence will involve verifying tenant leases and examining tenants’ rental history to verify that they are paying rent. This will ensure the future financial stability of your purchase. However, a vacant land to be purchased for development would involve different steps, as you won’t be dealing with residential tenants.
Below is an example of a due diligence checklist. This checklist includes everything you want to complete before purchasing a commercial property:
-Gather and organize all the documents. This can include property surveys, leases, appraisals, governmental documents, photos of the property, property title, tax forms, environmental reports, engineer’s or property condition reports, zoning documents construction documents, material correspondence, city records, offering memorandums or any other documents that the seller might have.
-Financial performance assessment We conduct an evaluation of the financial aspects of a property. It includes an analysis of the property’s income and expenses, as well as its potential for future growth. Reviews of current rent-rolls and future increases that the market, where the property is located can bear.
-Investigate all documents. Once you’ve gathered all of the paperwork, make sure to thoroughly investigate and understand all of the documents. Often, this requires the help of a commercial real estate attorney as well as a financial advisor or accountant. In that investigation, you want to “look at the title, and try to determine if there’s any encumbrances or restrictions on the property.
-Figure out financial options. If financing is needed, Cullina Management will assist with equity and capital relationships.
-Inspect the property. Spend time at the property and check every possible corner to make sure there aren’t any obvious issues. It’s best to have a team of people with you, such as the property inspector, property management, a contractor, an architect, a broker, and anyone else you think is important. You can also ask business owners, tenants, or employees what they think about the property, as that could lead to some surprising answers and information.
-Bring in site consultants. First, you want an environmental engineer to check the current and past uses of the property and see if there is any contaminated soil, water, asbestos, lead-based paint and more. This is called a Phase I Environmental Assessment and depending on the type of property (for example brownfields will require further studies), you may need more than one phase. Next, hire a surveyor to determine whether the property encroaches on a adjacent properties. Finally, traffic engineers can study the flow of traffic to and from the property and reveal potential infrastructural issues in the area.
-Next, utilize an architect and engineer. This is when you begin to put together your official plans for the property, such as renovations or development. Depending on your plans, you might need just an architect, or both an architect and civil engineer. If you do not have plans to renovate or develop the property, you would still need an engineer to conduct a comprehensive property condition report that will identify sub-grade and conditions of existing improvements and any repairs needed.
-Deal with any legal issues. Make sure to have a commercial real estate attorney who can make sure there are no liabilities or legal problems with the property or seller. Cullina Management will work closely with legal counsel to provide information gathered during due diligence to best position the client for success after purchasing the property.
-Close your deal. Once all of the above steps are completed, you can finally close on your commercial property.