Completing due diligence in commercial real estate transactions helps buyers ensure they have all the details regarding the property, its potential value, and any financial issues that could arise in the future. But many investors don’t have a clear understanding regarding each of the elements involved in completing due diligence. Our seasoned team is highly experienced in guiding investors through due diligence steps. In this new post, we’re taking a closer look at the processes involved in completing due diligence within commercial real estate transactions.
The Goal of Due Diligence
The goal of the due diligence process is to identify the most important issues to take into consideration when finalizing a purchase. The process should identify issues related to title insurance, easements, liens, and other elements that might be obstacles to effective and profitable ownership. Due diligence should indicate whether a building has to be significantly upgraded in the short-term, for example. If the property is subject to the Americans with Disabilities Act, new changes might have to be made to accommodate the latest regulations.
Reviewing Property-Related Documents
During due diligence, a number of property-related documents are reviewed and considered. For example, the team completing due diligence will review the property’s insurance history to determine if any claims have been made against the previous owners. If there have been past claims related to the property, these claims must be investigated before due diligence is completed. An example might be a water intrusion issue that required intervention from an insurance firm. The event must be analyzed both from an insurance perspective and from a structural perspective to determine if the issue has been resolved and if the current insurance policy mitigates potential future risk.
Analysis of Financial Statements
In completing due diligence within a property transaction, all financial statements must be carefully analyzed for instances of fraud or mismanagement. The property’s tax history will be reviewed to ensure that there are no existing liens against the landholder. In some cases, the owner’s financial history will also be reviewed to ensure they have made the proper maintenance payments for the property in previous years.
The seller and their team will carefully analyze the buyer's financial records, and any issues with financing will be highlighted during this analysis. This comprehensive review will prove that the buyer is serious about the investment and that they are capable of finalizing the deal.
Finalizing Legal Terms
As part of the due diligence process, the legal teams of both the seller and the buyer will discuss the transaction and come to an agreement on the handover. For example, legal teams for the buyer will add specific contingencies to the contract based on the finalization of the due diligence work.
By developing an in-depth understanding of the due diligence process, you can help safeguard the value of your investment. Our team has years of experience supporting clients through the investment process. To learn more about our company and your loan options, apply with us today.