CONSIDERING BUYING OR LEASING COMMERCIAL PROPERTY? CONDUCT PROPER DUE DILIGENCE BEFORE YOU PROCEED
Due diligence is a necessary part of any business transaction. In the context of buying or leasing commercial property, the goal of due diligence is to review and analyze all relevant information which bears on the property or the seller/landlord in order make a well-informed decision about moving forward with the acquisition or lease.
The level of due diligence will vary depending on your objectives in buying or leasing the property. For example, if it’s a purchase, are you buying for investment purposes, to develop the property or to operate a business on the property? For leases, how will you use the property? Your particular circumstances may require additional due diligence, but in general, the key questions you should consider include the following:
- What is the condition of the property? You should physically inspect the land, structures, fixtures and personal property which may be included in the sale/lease to identify any issues. Consider what repairs and upgrades may be needed based on the use you intend for the property. The condition of the surrounding area may also be relevant (e.g., dilapidated properties, ongoing construction, street closures, competitive businesses, etc.). Remember to verify that property descriptions and building square footage match those presented in lease or property documents. Get a survey if necessary.
- Is the property in compliance with all laws and regulations? It is essential to check compliance with building codes, ADA, zoning and environmental laws. Conduct title searches to confirm there are no concerns, including liens, mortgages, easements, etc. If you intend to change the use of the property in any way, assess your ability to get approval of those changes from the landlord or the government and the costs involved.
- Can you trust the seller/landlord? The reputation and track record of the seller or landlord is important. Examine their financial situation, past litigation history, and prior use of the property. Also talk to others who have worked with them, such as buyers of other properties and current and past tenants. If you are leasing the property, you will have a long-term relationship with the landlord, so you want to ensure they are reliable, responsive and in good financial condition.
- Are you paying a fair price? You must independently value the property or lease. You should look at comparables whether it is a sale or lease. In a leasing situation, consider whether you have any protections from competitors leasing in the same building or if the landlord is willing to give certain concessions.
- Have you independently examined all documents? Real estate transactions often have many relevant legal and financial documents that must be reviewed. For example, in addition to the ones mentioned above, you may need tax documents, insurance policies, engineering and environmental reports, and copies of relevant service contracts. If you are buying income producing property, you must review any leases, financial information on tenants and their rent payment history and get an accounting of income and expenses. Don’t rely on the seller/landlord to volunteer this information. Ask for anything pertinent to the transaction.
Real estate transactions involving commercial property are complex and it is essential to have good advisors to help you with your due diligence as well as with negotiating an agreement if you decide to go forward.
If you need assistance with buying or leasing commercial property, contact us for a consultation.
For more information on commercial leasing, read our related post 6 Questions To Ask Before You Sign A Commercial Lease.