Thorough due diligence is a critical step in any business purchase and sale agreement and that includes commercial real estate transactions. Before closing on a property, it’s imperative that you and your attorney investigate and analyze the property’s legal, financial and physical state. Failure to do so could jeopardize the success of your investment and leave you with more than just a mountain of regret – it could have serious financial implications as well.
Due Diligence Defined
Due diligence helps buyers and sellers identify potential risks and liabilities with a transaction, evaluate the property’s financial performance and operations, and ensure compliance with all relevant laws and regulations. There are several aspects you should investigate to achieve a comprehensive due diligence process.
For commercial real estate opportunities, one of the first steps to take is to evaluate your objectives for the transaction. This will help focus your due diligence. Depending on the type of commercial property and your goals for the building, certain areas may take elevated priority. Here are a few key aspects to consider during due diligence for a commercial real estate transaction.
Commercial Real Estate Due Diligence Checklist
- Legal considerations: For commercial properties, this means conducting a comprehensive title search to identify any liens, encumbrances or legal issues associated with the property’s title. This is one of the surest ways to help prevent post-closing issues. You’ll also want to verify that the property complies with local zoning laws and land-use regulations. Miami-Dade has strict zoning requirements, and you don’t want to be limited by regulations you could have foreseen. Be sure a full site assessment is conducted prior to closing on a commercial property so you can identify any environmental or zoning restrictions that may dampen development opportunities.
- Financial analysis: Review the property’s financial statements, tax returns, accounts receivable and payable, cash flow statements, and other financial records to evaluate the financial health of the property.
- Lease audit: If the property has tenants, examine lease agreements to understand lease terms, rental rates and any potential risks associated with tenant agreements. While there are pros and cons of purchasing real estate with an existing lease agreement, it’s critical to know what you are getting into.
- Physical inspection: Work with a professional to conduct a thorough inspection of the property’s physical condition. This includes the building structure, systems (HVAC, plumbing, electrical), and any environmental concerns. It’s also a good idea to complete an updated property survey and identify if there are any environmental risks or contaminants on the property.
These and other analyses, including reviewing any existing contracts, understanding insurance requirements and liabilities, evaluating market conditions, and understanding tax implications, are crucial steps for minimizing risks and making informed commercial real estate decisions. Working with experienced professionals, including attorneys, inspectors and financial experts, will help ensure a comprehensive evaluation of the property.
If you have plans to purchase or sell a commercial property in South Florida, let us help you navigate the process. At Sirulnik Law, we’ve managed and negotiated a broad range of transactions. We provide services from the early pre-due diligence stage through to transaction closing. To learn more about how we can help you, contact us at the Law Offices of Alex D. Sirulnik, P.A. to request a free consultation.
