Entering into any agreement that involves commercial real estate requires attention to detail and a sharp focus on the property and its potential. Those interested in purchasing should do everything in their power to gather all necessary information and uncover documents, financial details, and records dealing with the property.
Philip Goforth of Missouri is a construction and real estate professional who runs Genesis Companies. Below, he breaks down the process of effective due diligence in commercial real estate transactions.
What Is Due Diligence for Real Estate?
Philip Goforth explains that when dealing with commercial real estate, there are typically several parties involved, each with their own set of financial histories. These histories can affect the mitigation and/or buying process, which is why it’s best to uncover them in a timely manner.
Buyers need to make sure that they keep their eyes open for zoning restrictions, possible liens, and even schedule a complete inspection to make sure that the property is in a sound and stable state before moving further.
The Prep
Before you take any binding steps forward, Philip Goforth of Missouri says it’s critical to first have a deeper understanding of the transaction and all parties involved. Because commercial real estate is typically bought with an objective in mind, interested parties should first visit the property and walk through to ensure that it meets their needs.
Buyers should move forward with their intended goal in mind, ensuring that the property and the area surrounding it are suitable for that purpose. Not only should they complete a thorough investigation of the property but also acquire an environmental suitability assessment.
This will help buyers buy more confidently and ensure that the property of interest is free from harmful contaminants like mold and lead.
Philip Goforth explains that sellers are required to share documents at the time of sale, though buyers will still need to push to uncover more than just what’s required. Buyers should gather as much information as they can, attempting to get ahold of the entire story before purchasing.
Due Diligence Checklist for Commercial Real Estate
From the very early stages and beyond, all parties need to start thinking ahead and do their due diligence. For commercial real estate, there are several things that buyers should look into first, which is why we’ve created a checklist to follow along with.
Titles
First of all, the title of the property is needed. The seller should have it with them along with all related documents to the title so that potential buyers can pour over it.
ALTA Survey
The ALTA Survey of a structure will give all of the most intricate details including blueprints according to Philip Goforth. These are used to have a good idea about the foundation and the structure as a whole.
Zoning Compliance
When structures are built, they have to be zoned. These zoning documents are important going forward to ensure that it is in a spot that won’t cause any interference with other structures.
Environmental Reports
All buildings must also undergo checks to make sure that they are environmentally stable. That includes checking for mold and asbestos, as well as other harmful substances that can cause harm to those who work in or around the building.
Financial Documents
Philip Goforth of Missouri explains that buyers also need to obtain all financial documentation, including records of income, security deposits, and more. It’s also important to have a copy of taxes paid and/or owed before changing ownership from one person to the next.
Buyers should request this documentation along with detailed information about bills paid and/or owed for at least three years. This will help them better understand the situation they’re getting into and help them create their budget.
Permits and Licenses
Commercial real estate is sometimes also attached with permits and licenses, all of which buyers should have in their possession. Buyers should look into expirations and renewals of all necessary licenses and permits, as well as what each of them entails so they have a solid understanding before purchasing says Philip Goforth.
Insurance
This includes any and all documentation that involves insurance for the building, operations, or any third-party insurances needed.
Litigations
If there are any charges pending on the property or those who own the property, buyers will need to be sure to get ahold of information, ensuring that they know all of the details before they make a purchase.
If there is any other significant documentation that buyers or sellers can think of, they should acquire it and have ready to present if needed. It’s better to have excessive paperwork than risk a holdup in processing the transaction.
Before You Go
Philip Goforth of Missouri reminds that all transactions are unique and come with their own set of necessary measures in order to close efficiently. All parties need to use the due diligence period effectively in order to have a full understanding of what is being transacted so everyone leaves the table satisfied with the acquisition.
