Buying a commercial property is a HUGE step for any business or investor. It’s not quite like buying a house, where you check the roof and the plumbing (which is already a lot). Here, there are many more layers. And skipping a thorough review, what we call “Due Diligence,” can cost you a lot of money and headaches down the road.
Think of Due Diligence as your personal (or expert-assisted) detective work to make sure the property is really what it seems and that there are no nasty surprises hiding. It’s the time to lift every rock and look underneath.
Why is it so important?
Because once you sign, most problems become your problems. Due Diligence gives you the chance to discover if there are hidden debts, serious structural issues, usage restrictions you didn’t know about, or if the numbers (income/expenses) are actually real. If you find something major, you can renegotiate the price or, if it’s really bad, walk away from the deal before it’s too late!
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Here are the essential aspects you absolutely cannot overlook:
The financial health
This is key, especially if the property already generates income (e.g., it has tenants). You need to thoroughly review the financial statements from the last couple of years. Is the rental income as high as they say? What are the actual operating expenses (taxes, insurance, maintenance, utilities)? Ask for copies of current lease agreements to see the terms, expiry dates, and if tenants are current on payments. The numbers don’t lie!
The physical condition of the building
This is where inspectors come in. Don’t skimp on hiring qualified professionals to check everything: the structure, roof, electrical systems, plumbing, HVAC (heating, ventilation, and air conditioning). Are there major damages? Old systems that will need replacement soon? It’s also CRUCIAL to get a Phase I Environmental Site Assessment done to rule out contamination on the land or in the building. You don’t want to buy an environmental problem.
Legal and zoning matters
This can get a bit technical, but it’s super necessary. You need to obtain and review a title commitment to ensure the seller actually owns the property and there are no liens or outstanding debts on it. Check the local zoning: can you use the property for the purpose you intend? Are there height restrictions, parking requirements, or land use limitations? Also, review past building permits or renovation records.
The tenant situation (if applicable)
If you’re buying a building with tenants, they come with the property. Review each lease agreement. Are they solid? Are tenants paying on time? Are there any disputes? Understanding the tenant base gives you an idea of the stability of future income flow.
You can also read: How to evaluate a commercial property for investment
Other contracts and utilities
Review any existing maintenance contracts (elevators, landscaping, security) and utility costs. Are there long-term contracts you’d have to assume?
In a nutshell…
Due Diligence takes time and costs money (for inspectors, lawyers, etc.), but it’s a SMART investment. It protects you from nasty surprises and gives you the knowledge to make an informed decision or negotiate from a stronger position.
Don’t try to do it all yourself. A good team (commercial real estate attorney, inspector, accountant) is your best ally in this process. Investigate thoroughly, ask the tough questions, and make sure you know exactly what you’re buying. Your future business or investment will thank you!
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