Issues That Commercial Real Estate Due Diligence Can Uncover
Because of the size and nature of most commercial real estate transactions, conducting thorough due diligence into the property and the transaction isn’t optional. Buyers and renters need to be able to weigh the potential risks in order to make informed decisions. Each transaction is unique, but there are some common issues that may be revealed during the commercial real estate due diligence process, including:
Undisclosed Legal Issues
Conducting a thorough inquiry into a commercial real estate transaction should identify whether the property is encumbered by judgments or liens, and whether there are any pending actions that could lead to such a result.
Building Code Violations
Buyers who opt to disregard due diligence, or to conduct only a cursory review, may be surprised to learn that their newly acquired real estate doesn’t meet municipal building code standards. Due diligence can help uncover work completed without the proper permits or violations of ADA codes.
Structural Deficiencies
A third-party review of the property itself can identify structural issues with things like the walls, roofs, or HVAC systems that were not identified in previous reports or documents.
Zoning Issues
Due diligence should confirm that the building is classified and zoned to allow for the purchaser’s intended use for the property. Existing violations or pending changes can negatively impact purchasers, who may find themselves dealing with frustration and added expenses if this step is overlooked.
Problems with Existing Tenant Lease Provisions
When a property comes with existing tenants, examining and analyzing existing lease agreements is critical. Doing so can identify problems with caps on expense provisions, fixed rents, tenant credit worthiness issues, cancellation provisions, sublease provisions and more.
Commercial Real Estate Due Diligence Expertise
In addition to these potential issues, due diligence should also include an evaluation of financing, lender requirements, the terms of closing statements, and property valuation determinations.
The benefits that come from conducting commercial real estate due diligence and identifying and addressing potential issues before signing the closing statement are imperative. At Baer Reed we assist firms by providing due diligence services on commercial real estate and other types of transactions. To learn more about how we can help, contact Baer Reed online, or call 888-433-1990.
- On April 27, 2017
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