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Due Diligence for Real Estate Purchases Part 1

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Due Diligence for Real Estate Purchases Part 1

Written by Brent Pace for Gaebler Ventures

After finding what you think is the perfect location and property for your company, you will probably be very eager to purchase it quickly and get moving. Tread carefully, however, there are scores of due diligence items that you will want to check before closing on that transaction. In part I we discuss tenant information items, property operations items, and property ownership items.

Searching for a property can be exhausting work.

It can take months to find the right location with the right building that will suit your needs. After you find it you will probably want to close on it quickly. After all, you're an entrepreneur and you're used to acting quickly to secure the things you need for your business. But tread carefully here, because there are a lot of hidden dangers in purchasing real estate. Before you close that purchase, think about a few of the things below and double-check them to make sure you are getting a fair deal.

Tenant Information Items

If your building will have other tenants in it besides yourself, you will want to check and double check (or ask the current owner to provide) a few important items:

Re-read all tenant leases, amendments and any other agreements
Copies of all correspondence with tenants
Current financial statements for all tenants and any lease guarantors
Profile and background of each tenant
Insurance certificates
Tenant estoppels certificates
Summary of pending leases and asking terms for vacant spaces

Property Operations Items

There are many important due diligence items that relate to the operation of the property. Anything related to the rent roll, utility bills, maintenance and repairs of the property, service agreements, etc should be procured. Sometimes the current Landlord has entered into long-term agreements that will survive the transaction - you will want to be aware of these agreements and the cost implications.

Current certified rent roll
Standard form of lease
Certified operating statements for the last few years as well as a current budget
Prior two years and year to date tenant escalation billings
Utility bills for the past three years
Tax bills for the past three years as well as information on any special assessments
Monthly rental delinquency report for the past year
Schedule of capital improvements and reports from the past three years
Capital improvement plan for the next few years (if available)
Operating and service agreements, contracts, and leasing agreements
Property management and leasing agreements (especially if the property is managed by a third-party contractor)

Property Physical Characteristics

These documents are important because they give you more important details on exactly what you are buying. It is important is to learn about the seller including financial statements and company background. If the company is selling the property for a unique reason you will want to be aware of it.

Perhaps the most important information here is the summary of all pending litigation. Not only will pending litigation potentially harm your ability to close the sale, it also gives a good indication of the quality of the previous Landlord and/or the Tenants in the building. This information is very helpful to you as you try to make a good purchase decision.

Summary of site history, ownership and development
Environmental impact reports
Copies of any ground leases, master leases and joint venture agreements
Contracts or commitments to finders or brokers that will survive closing, if any
Financial statements of seller
Seller background and brochures
Copies of consent decrees or orders to which seller is a party
Copies of agreements requiring third party consent (deeds of trust, security agreements, etc)
Summary of all pending litigation

Special thanks to Jane Maushardt of RREEF for the master due diligence list.

Brent Pace is currently an MBA candidate at University of California at Berkeley. Originally from Salt Lake City, Brent's experience is in commercial real estate development and management. Brent will have tips for small business owners as they negotiate their real estate needs.