Why Due Diligence for Commercial Real Estate Is Necessary
Before purchasing any piece of commercial real estate, organizations should be confident that the target property will meet their project and/or transaction objectives, and that they truly understand the precise details of what they are purchasing. Conducting broad and thorough due diligence for commercial real estate transactions is a best practice for several reasons. It can:
1. Identify Major Issues That Could Impact Use of the Property
Due diligence can uncover potential problems like zoning issues, environmental problems, or other types of legal issues or encumbrances. If an organization closes on a commercial transaction without conducting due diligence and later discovers an issue that interferes with the use of the property, it can be costly. The law assumes that purchasers of commercial properties are sophisticated buyers, so consumer protection laws may not apply.
2. Uncover Issues with Leases or Contracts
Commercial real estate often transfers subject to existing tenants’ leases or service contracts. During a thorough due diligence process, documents should be reviewed so the potential buyer understands the scope of the obligations that they will be assuming, if they move forward with the closing.
Organizations that are acquiring commercial property as investments will want to be reasonably certain of the quality of existing tenants and the stability of expected future cash flows. They will also want to be prepared with information on any other rights or obligations that exist under the current leases or contracts.
3. Reveal Potential Title Issues or Construction Barriers
Due diligence on commercial real estate should include title work to ensure the buyer will be obtaining clear, marketable title after the close of the transaction. The due diligence process should also include land surveys to identify and address any potential problems, especially when the buyer intends to construct one or more new buildings on the site.
4. Ensure Property Will Structurally Meet the Intended Purpose
Buyers who intend to use the property in substantially the same condition it is in should conduct sufficient due diligence to be confident that the building(s), parking area(s), and other structures on the property will meet their needs. No business wants to buy a property and later learn that its trucks cannot access the loading docks or that the parking lot isn’t large enough to accommodate the expected business traffic. Due diligence can provide reassurance that the property being considered is the right one for that business and its needs.
Expertise with Due Diligence for Commercial Real Estate
At Baer Reed, our experienced legal professionals are efficient and well-versed in conducting due diligence for all types of commercial transactions. To learn more, contact us online or call us at 1-888-433-1990 today.
- On May 9, 2018
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