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A Guide to Due Diligence for Commercial Real Estate

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Completing your due diligence is necessary for any successful commercial real estate transaction. If you are already investing so much time and money into commercial real estate sales, it is worth it to go through the extra steps to ensure everything is in order by completing your due diligence. However, that said, many business investors find the process of due diligence to be a daunting and tedious task. For that reason, if you have not already done so, now is the time to bring professional legal assistance as an experienced commercial real estate attorney.

It’s vital that no stone is left unturned and no documents go missing or unsigned. We all hate our homework, but this is when study skills come in handy. Your legal team must pour over every document to review for errors, inconsistencies, or weak language that could one day be exploited.

The Marques Eason Law Group has years of experience providing our clients across the Chicagoland area with dedicated legal representation. We pride ourselves in providing honest, clear-minded, and tenacious legal services. As your commercial real estate lawyer, Marques Eason, we’ll help you complete your due diligence so that your commercial real estate acquisition or sale can proceed smoothly and without incident.

What is Due Diligence?

In commercial real estate, due diligence is the stage in which the interested parties must inspect every aspect of the transaction. Factors that must be considered include details surrounding the property, the buyer, the seller, banks, financing, leases, and all the required paperwork.

Also known as the feasibility., due diligence allows the prospective buyers to learn as much as possible about the property they seek to purchase. The stage is essential for every real estate transaction, especially commercial ones. Due diligence helps buyers decide how they spend their money, the people they’re getting into business with, and the property they’re putting money down on. Properly conducted due diligence can also help avoid future issues, including the potential for contract disputes and litigation.

It is wise to make a due diligence checklist. However, the steps involved in your due diligence process might differ from someone else’s. Every property is unique, as are the buyers and sellers.

What Happens During the Due Diligence Stage of a Commercial Real Estate Transaction?

The due diligence process includes:

  • Inspections of the property looking for hazardous toxins, construction defects, and other issues not disclosed in the original documentation related to the property.
  • Reviewing all legal documents related to the property and the sale.
  • Research into local market conditions to better understand the market and the area and the going price for properties such as these.
  • Reviewing the contract to ensure that all terms are agreeable and that the language is written plainly, with no possibility for misunderstanding.

What Are the Necessary Documents for the Due Diligence Stage?

A long list of legal documents is involved in every real estate transaction. In due diligence, these documents must be reviewed with utmost scrutiny. Upon review, the buyer should be allowed more confidence that they are making wise decisions and purchasing the property.

The first and arguably most crucial document you will review in your due diligence is the purchase and sale agreement. This legal document will outline the terms of the sale, including the purchase price, the date for final closing, the date on which the buyer shall take possession, and any other terms related to the sale or lease.

An appraisal is recommended for any real estate transaction. A well-conducted appraisal provides a third-party opinion on a property’s value. This report can help in the price negotiation stage.

Due diligence reviews and the profit and loss of the property can help ensure that the property is a wise investment and that it stands to make a profit for its buyer.

During the due diligence stage, reviewing your insurance policy is highly recommended. You require adequate insurance company coverage to suit your needs as a commercial business or storefront.

Another vitally important due diligence legal document is the title search report. The title report shows who owns the property and whether there are any liens or encumbrances against it. A zoning report is also essential, as it ensures that you can use the property as you intend to here you go. Similarly, a survey can provide a report on the property’s boundary.

A phase one environmental site assessment (ESA) can help detect possible contaminants present in and around the property. And the building inspection report can help identify any construction defects in the property.

What’s On the Commercial Real Estate Due Diligence Checklist?

It’s wise to keep a checklist of everything you need to consider and review during due diligence for a commercial real estate purchase or sale. A checklist can serve as a helpful guide so that you can make the most informed decision possible as the buyer or seller in a commercial real estate transaction.

Your due diligence checklist should include:

  • Determine the most satisfactory financing option for you. Ideally, you’d have your finances figured out before you reached the due diligence stage, but now is the time if that’s not possible.
  • Gather every legal document, even potentially relevant to the commercial real estate transaction. These documents can include but are not limited to, lease terms, appraisals, environmental reports, property titles, tax forms, government documents, zoning reports, engineer reports, city records, and recent photographs of the property.
  • Inspect the property personally and with professional inspectors’ help. Spend time at the property. This is a significant investment; don’t worry about checking around every corner, looking for leaks, cracks, and other defects. Consider hiring a team to help inspect the property. Your group could include a property manager, a contractor, and an architect.
  • Investigate past uses of the property to determine whether or not there was any possible contamination of the soil, water, or paint. Asbestos is a genuine concern.
  • Investigate the seller and the property. The buyer does not want to find out later that the seller or property has legal issues or liability risks.
  • Review every legal document carefully and thoroughly. Consider employing the assistance of an accountant and a commercial real estate lawyer. You may need to modify or revise existing documents. This may take time, but it can save you from potential headaches.
  • Review operations. After the buyer has taken possession of the property, it’s essential to fully understand the lease agreement, operation expenses, utility bills, and rent rolls. How much of this will be covered by the property owner, and how much will be paid for by the lease tenant? All of these details should be covered in due diligence.
  • Review the local market customer base. Is this the right location for your business or storefront?

Contact the Marques Eason Law Group for Your Commercial Real Estate Legal Matters

Our legal team is highly experienced and knowledgeable in commercial real estate cases. As your legal representative, our mission is to provide you with the confidence to proceed with your commercial real estate transaction and know that you’ve done your due diligence. The property might be ideal, but nothing is more important to us than the happiness of our clients. To secure that happiness, we must do our due diligence, no matter how daunting or tedious that may be sometimes.

Contact our law firm for an in-depth case evaluation. 312-847-4810.

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