An Overview of the Due Diligence Period in a Commercial Real Estate Transaction

If you’re in the middle of a commercial real estate transaction, there are a lot of things you need to do. One of these things is called due diligence, and it is an essential and comprehensive stage of any commercial real estate transaction. It’s actually so important that your contract should include a clause allowing for this process to take place.

So, what’s due diligence? Due diligence is the process of investigating the physical status of the property along with matters that may affect its use or obtaining property title.  It typically takes place over a 30-60 day period, and is something that you, your broker, and your lawyer must take great care to do thoroughly. Although sellers have a duty to disclose known defects and problems with their property, the buyer bears the responsibility of actually scrutinizing the property to make sure there isn’t anything else.

As you might have guessed, there are a lot of things to think about during due diligence and it’s easy to feel overwhelmed. So, if you are about to enter into a commercial real estate transaction, it’s essential that you speak with an experienced real estate lawyer right away. In the meantime, here’s a brief overview of what you need to know about performing due diligence for your commercial real estate transaction.

What steps do you need to take?

Title – Whether you’ve already purchased commercial real estate in the past or this is your first time, one of the most important steps is to perform a title search to confirm that the chain of title is clean and that the seller actually does own the property. A title search will also show whether there are any liens or encumbrances that will affect the value and usability of the property.

Environmental – Next, your team is likely to perform an environmental inspection, which looks at past uses of the property and the surrounding vicinities to check for any environmental problems or liabilities. If you are financing the property, this will most definitely be a requirement of the lender.  The purpose of this is to determine if there are any hazardous materials on or around the property that may threaten its suitability for use. Although expensive to do, it’s a lot more expensive to fix environmental issues later on. At least this way you can negotiate with the seller to factor in any remediation costs.

Land Use & Zoning – Another very important step in your due diligence process is to confirm the property’s land use and zoning designations.  This review will confirm and ensure that your new piece of real estate can actually be used in the way you want to use it. For example, you may be purchasing a commercial building and plan to open up a clinical research facility.  However, the zoning code may not permit such a facility or may require a separate approval from the County and/or a municipality. And, let’s say that the use is permitted, but currently there is a non-medical use on the property. Then to obtain a change of use for the property, you may be faced with impact fees that can add $100,000 or more of unanticipated costs to your budget.   

Lien Search – It is also very important to do a lien search.  In addition to finding all liens that have been recorded against the property, a lien search will also identify building code violations and/or open code enforcement actions that have not yet become a lien.  If these are not uncovered prior to closing, you as the new owner will be responsible for these violations and enforcement actions.

Conducting a proper due diligence of the property, will allow you to make a fully informed decision about whether to move forward with the purchase.  It will also allow you the opportunity to negotiate a price reduction or the completion of certain repairs at seller’s expense.

Contact Ser & Associates today.

If you are purchasing real estate in Florida, please contact us at 305-222-7282 and let us assist and guide you through the landmines.