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Due Diligence for Acquiring Commercial Property

As a buyer of commercial properties, you should accomplish two types of due diligence before moving forward with the acquisition. These types of due diligence will protect you against incurring liabilities, and you will be made aware of precisely what you are purchasing. It also gives you a more straightforward overview of what you can negotiate and the terms you could offer. The two types are physical due diligence and financial and operational due diligence.

Physical Due Diligence

Start with a PCA report or property condition assessment, which physically checks the property's construction. It will also tell you about the capital needs you need to address and the property's future. Next, you will need environmental testing to rule out any hazardous contaminants present on the property. There will be physical surveys done to measure the property, determining the property's legal boundaries. 

For older properties built more than 40 years ago, there are two kinds of asbestos surveys you may need. These surveys ensure that the property does not contain the material that, once disturbed, the fibers can be inhaled, risking the development of fatal asbestos diseases. Make sure that the roofs are in good condition, ask when they were last repaired or replaced. These include checking on the elevators, air conditioning, and ventilation that can cost hundreds of dollars in repairs.  

Inspect the properties of fire escapes and areas that could be fire hazards. You can also check the property's historical capital expenditure analysis to check what the previous owners spent on and what you will need to look into moving forward. 

Financial and Operational Due Diligence

The financial and operational due diligence starts with abstracting your leases. These documents include all the terms and clauses that have been agreed upon. Then there is ensuring that the title reviews have no irregularities from previous owners. A company or your attorney can do these reviews. It is essential not to take this for granted so that previous owners can not make claims of illegalities in the chain of selling. 

Reviewing any other third party contracts is also essential. Documents such as tenant estoppels are also vital to the due diligence when buying a commercial property. These documents confirm that the tenant and landlord understand the lease terms, and all agreed to is documented. Lastly, lenders are required SNDAS or subordination, non-disturbance, and attornment to protect tenants and lenders in case of foreclosure. The closing process can take anywhere from 30 to 90 days.

Ensure all of the findings during the physical due diligence and financial and operational due diligence process have been finalized by your due diligence team, leaving no room for uncertainties or doubts before making an offer or executing a purchase and sale agreement. During the finality of the purchase, leaving circumstances to chance could cost you and your new commercial property a lot of expenses in the near future.

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