What is Due Diligence in Commercial Real Estate
Written by Julia Ribeiro and Marisa Marulli (REMCO Communications)
Reviewed by Lisa Gerard (REMCO founder and principal)
October 12, 2021
Purchasing a popular asset is a process which may have potential buyers or investors feeling crunched for time (as they are eager to close the deal), but it is important to take proper time to evaluate a property during the due diligence process.
What is Due Diligence?
Industrial properties located in a plaza
After an offer is made on a property, a set period of time known as “due diligence” takes place, allowing the potential buyer to investigate property details more closely before being obligated to close the deal.
In this time period, “asset discrepancies” may arise. These are important factors about the property or portfolio that are not clearly enclosed in the offering memorandum, which may sometimes include pre-existing structural damages, past management reputation and prior owners’ legal and financial liabilities, to name a few.
The offering memorandum is a legal document prepared by a property owner to disclose property details, financial details, purchase terms and more to potential purchasers. This document is usually one of the first items a potential buyer may look at when assessing an asset.
Potential buyers and investors should use this critical time wisely to unfold answers to the right questions, uncover asset discrepancies and evaluate if the investment is aligned with their goals, without merely relying on the offering memorandum.
How Long Does the Due Diligence Period Last?
The due diligence period typically lasts thirty days, but if the due diligence manager is utilized when signing the contracts, this expert may be able to negotiate a longer investigation period.
Many times, hot assets require the due diligence process to be completed in a shorter time frame, as there are more potential buyers involved. When this happens, it is important to move as fast as possible, without letting any detail get overlooked.
A Look into REMCO’s Due Diligence Checklist
In order to mitigate any risks of moving quickly to seize a favorable asset, REMCO relies upon an internal due diligence checklist built from over two decades of industry experience. Throughout these twenty years, mistakes, oversights and surprises have shaped each item on the list, with some considerations added and dismissed depending on the asset.
Although each deal may have characteristics exclusive to the asset at-hand, there are a series of factors that are fundamental and should be taken into account in every transaction.
The following due diligence checklist is important to both the buyer and the seller. As previously mentioned, the buyer must have a clear understanding about everything regarding the asset, such as financial liabilities, physical structure, key relationships and legal obligations. The seller may also use the due diligence checklist to make the process more efficient by anticipating common checklist items, promptly providing requested documents or disclosing information before requested.
Below are a few fundamental considerations to add to your due diligence checklist. For further details or items specific to a particular asset, we invite you to contact us.
Third Party Reports
It is important to gather recent and historical third party reports describing property location, boundaries and conditions. This may include items such as a survey, property condition assessment and environmental site assessment.
Financial Information
Investors should request the property’s financial performance throughout the years to get a clear understanding of the market in that specific location and with the property’s current condition. This may include current and historical rent rolls, current and historical operating statements, capital expenditures over the past five years, capital expenditure budget for the upcoming five years and a list of any deferred maintenance needing to be attended to imminently.
Loan Information
Investors who choose to assume the loan of an asset need to evaluate the terms and conditions of the liability. This may include requesting items such as loan purchase and assumption agreement, copy of loan policy and any forbearance agreement or amendment.
Tenant Information
When acquiring a commercial real estate asset with prior existing tenants, it is important to collect tenant information. This may include requesting details of leasing agreements and any verbal and non-verbal agreements, list of repairs and maintenance on behalf of tenants, aging receivables report and 12-month historical ledger for each tenant.
Property Information
Investors should request all documents related to the property of interest, this may include documents such as insurance bills, special assessments, utility bills and copy of title policy.
Service Contracts
When acquiring a commercial real estate property, investors should request a list of the service contracts that help maintain the property. This may include information such as fire safety, landscaping, waste removal and property manager.
Important note: A due diligence checklist is an extensive document that leaves no stone unturned; the list above highlights key points present in most checklists, with a brief example of related documents.
Due Diligence Management with REMCO
Potential buyer considering contract terms before signing a legal document
REMCO specializes in comprehensive solutions and therefore goes beyond collecting items on a due diligence checklist.
Our due diligence managers approach negotiations with the goal of alleviating our client from pressures associated with a popular asset.
Once a due diligence time period is negotiated and obligations are agreed upon, REMCO scales through all of the information from the checklist, talks with brokers in the area, secures multiple loan proposals, interviews tenants, performs lease abstracting and financial modeling and more. After, REMCO provides the buyer with a succinct report informing of key decision-making data. The buyer is then in an informed position to make a decision prior to the due diligence period expiration.
More important than a deal going through, every REMCO investment recommendation focuses on the investor and finding a property that meets their goals.
