No matter what type of business you’re involved in, there’s going to come a time when you must concern yourself with the process of due diligence. Due Diligence is an audit, review or investigation that is undertaken during the course of a business deal. The goal is to confirm (or discover) all the facts, figures, and details of the transaction under consideration, a systematic way to minimize risk in a business decision. In most instances, due diligence is related to financials, but performing due diligence means much more than simply looking at the easy-to-research numbers. There are several instances, including commercial real estate, where so much more is examined.
What Falls Under Commercial Real Estate?
Commercial real estate is property that is used strictly for business purposes that can consist of retail stores, office space, hotels and industrial use. In most instances, commercial real estate is leased to tenants who use it for income-generating activities. Due diligence comes into play in this sector in the following ways.
- Purchase and sale agreements: These are standard buyer/seller transactions, with a buyer looking to purchase commercial real estate from a seller.
- Purchase and sale of foreclosure properties: This is similar to the purchase and sale agreements above, except there is an extra layer added, which is dealing with bankruptcy courts over property that is either undergoing foreclosure or has already been foreclosed upon.
- Purchase and disposition of real estate portfolios: This is another complex transaction, as these are multiple properties in a portfolio that the buyer and seller have to contend with. Furthermore, these properties may be in different states, and have mortgages of varying terms.
- Commercial real estate contracts and leases: These are legal agreements between the owner (lessor) and the renter (lessee).
- Partnership and operating agreements for real estate projects: These are for partner groups looking to develop or planning on entering into a partnership to operate a commercial real estate concern.
Commercial Real Estate Due Diligence Checklist
As is the case in virtually every type of business transaction, performing due diligence in the commercial real estate world is vitally important. Why is that? For starters, unlike residential real estate, which has scores of consumer protection laws that are applicable to both buyers and sellers, there are very few of those sorts of provisions in the commercial real estate world.
Due diligence helps to minimize and mitigate any financial concerns and risks by covering the financial, compliance and seller obligations in the deal. This information could make or break the deal, so it’s important to not cut corners and find out all the hidden details (both physical and legal) of the property. Navigating a successful deal in the commercial real estate arena requires due diligence, as there is often vital information that may not be readily apparent when inspecting a property or its portfolio value. And for that, you must create a commercial real estate due diligence checklist.
What Is Involved
As is the case with any business deal, due diligence provisions vary from situation to situation, but in the commercial real estate world, such provisions include the following.
- Physical inspection: This entails inspecting all the physical areas of the site, which includes inspecting all structures and mechanical systems located on the property, along with the environmental and ecological condition of the property.
- Document review: This entails reviewing all documents connected to the property, including title, survey data and tax records.
- Tenant information: This entails ensuring that all data on all the tenants are current.
- Operating information: This includes locating financial statements, tax data and capital expenditures if any.
- Legal information: Among other legal concerns, this includes locating licenses, permits, title insurance, any records of violations, zoning variances and historical judgments, if any.
The due diligence process can commence before or after the signing of the purchase agreement. However, if signed, if due diligence occurs prior to the signing, the seller generally requires an early access agreement or a confidentiality agreement of some sort. Note that the due diligence process isn’t quick — typically, it takes 30 to 60 days, with longer periods for particularly complex transactions.
VDR’s for Commercial Real Estate
Working in the complex world of commercial real estate requires some additional tools to help expedite and make the entire process more cost-efficient as well as secure. One of these tools is a virtual data room (VDR), which is a highly secure online location, where all parties involved in a process in a commercial real estate transaction can easily and securely share and store the documentation required for the process. A sophisticated VDR delivers secure access using enterprise-level encryption, multiple layers of security and customizable rights management, which allow only sanctioned parties to access (or edit) certain documents.
A VDR used in commercial real estate transactions is helpful in many ways, which include the following:
- Secure document sharing and editing
- Audit logs, which are necessary for security and compliance
- Ease-of-use for all parties involved in the transaction
- Massive amounts of storage for files and support of multiple file formats
- Real-time activity insights that allow you to see who has viewed and/or edited documentation
- High-end security features, which include encryption, two-factor authentication, watermarks and single sign-in controls
- Sales and development of real estate portfolios
CapLinked Is the Solution
CapLinked, an industry-leading provider of VDRs for the due diligence phase in all types of transactions, including commercial real estate, delivers a secure way to store and share vital documents that are necessary for successful transactions. CapLinked’s user-friendly interface is compatible with virtually every OS, which gives users the ability to upload, access and download documents from any type of computer, smartphone, or tablet anywhere in the world. For pricing on a VDR that will help simplify, expedite and keep your commercial real estate transaction under budget, start a free trial today.
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.
Millman – Commercial Due Diligence
Angel Law Offices – Due Diligence Real Estate Checklist
Einhorn Barbarito – Due Diligence in Real Estate Purchases