Real Estate Due Diligence Template

The Real Estate Due Diligence Checklist provides a framework of initial due diligence requests. These are tailored specifically to transactions involving commercial real estate spaces.

• Most suitable for transactions that involve commercial real estate
• Initial requests help prompt basic information for a general overview of the target company
• Playbooks may be customized to accommodate your team’s or deal’s unique needs

What Questions does Real Estate Due Diligence Checklist Include

Property Information

Likely if you are investing in commercial real estate you are interested in the physical property or location itself. Appraising and inspecting the property’s specs, features, and physical space is integral to closing a real estate deal. It helps you accurately assess value and discern if it will be a profitable investment. Data required includes roofing and HVAC information, environmental reports, and conducting or ordering in-depth inspections.

ITEMS IN PROPERTY INFORMATION DUE DILIGENCE INCLUDE:

• Review mechanical reports (HVAC, electric, structural)
• Review all inspection reports (roofing, HVAC, foundation, septic)
• Review environmental reports (soils tests, radon, mold, lead paint and asbestos)
• Review geotechnical soils reports and documents
• Review seismic risk assessment (probable maximum loss) reports
• Review plans, specifications, and other documents detailing the property's "as build" condition
• Order Property Condition Assesment
• Order current Phase I Environmental Site Assessment
• Order current Additional Site Investigation (Phase II)
• Obtain certification or studies confirming the property's square footage
• Obtain reports certifying compliance with Americans with Disabilities Act (ADA) requirements
• Review building warranties and guarantees
• Review certificates of occupancies, licences, and building permits
• Receive copies of insurances (liability, casualty, etc.)
• Review energy usage reports in conjunction with energy expenses
• Review matienence schedules for property and property equipment

Operational Information

Often times, commercial real estate is more than just a property; it’s a business. What this means is that aside from just purchasing the physical space, you could also acquire a bundle of employees, vendors, and other relationships. With that in mind, you need to confirm that everything is healthy and complaint on the business side of things. Data required includes employee metrics and information on the company’s relationships with employees and vendors.

ITEMS IN OPERATIONAL INFORMATION DUE DILIGENCE INCLUDE:

• Obtain a list of positions, employees, wages, and benefits
• Review history of labor or strikes, verify no current labor disputes
• Verify no disputes with brokers, suppliers or employees

Survey, Title, and Zoning

Zoning laws dictate the rules and regulations that govern building, remodelling, or utilizing your space commercially. However, these laws change constantly. Performing survey, title, and zoning due diligence will help you certify that everything is up to date and in working order. It will also help you learn more about any potential restrictions that are unique to your property. Data required includes zoning reports, surveys, covenants, restrictions, and easements.

ITEMS IN SURVEY, TITLE, AND ZONING DUE DILIGENCE INCLUDE:

• Appoint a title company
• Forward appointed company the seller's title commitment and other respective documents
• Order current title commitment, ALTA survey and other respective documents
• Review most recent title and/or boundary survey
• Obtain zoning reports
• Confirm all leases and entitlements are in the seller's name
• Review covenants, restrictions, and easements

Tenancy

If the target property is one that leases to tenants, you will want to do a thorough investigation of them and their leases. This will help you get to know your new customer, help ease the transition of new ownership, and give you a better scope of each parties’ responsibilities. Most importantly, you want to verify all of their leases, security deposits, etc. with a keen eye on financials. Some documents needed here are leases, amendments, and rent rolls.  

ITEMS IN TENANCY DUE DILIGENCE INCLUDE:

• Obtain current rent roll
• Review reports detailing current and historic vacancy rates
• Obtain a copy of all leases containing all associated exhibits and attachments and amendments, including guarantees and subleases
• Review tenant files (lease, correspondence, etc.)
• Resolve any standing tenant issues
• Obtain copies of LOCs
• Review security deposit information and reconciliation
• Review tenant credit quality and payment history reports
• Review cost pools for overcharges to tenants
• Review leases and highlight contractual landlord obligations to tenants
• Prepare and distribute Tenant Estoppel Letters
• Receive and review all distributed Tenant Estoppel Letters
• Tenant interviews

Legal, Contracts, and Insurance

The last thing you want to walk into when engaging in a new investment is walking into a sticky web of legal issues. Conducting this type of due diligence will ease the transfer of ownership and safeguard from potential issues. Elements needed here include litigations, insurance policies, and a team to help transfer any trademarks.

ITEMS IN LEGAL; CONTRACTS; AND INSURANCE DUE DILIGENCE INCLUDE:

• Review historic and pending litigations
• Review and transfer trademarks, brochures and websites to the buyer
• Review current insurance policies in effect on the property
• Obtain an insurance quote from Risk Management

Financial Information

As with any other investment, financials are key in valuing an investment, especially if the property owner is already claiming that it is profitable. Nonetheless, financial due diligence helps piece together the full picture of your investment and protect against unexpected problems down the line. Items here include income statements, expenditure history, and expenses.

ITEMS IN FINANCIAL INFORMATION DUE DILIGENCE INCLUDE:

• Review income and expense statements from the past three years
• Review audited financial statements from the past three years
• Review and compare actual vs budgeted operating and capital expenses
• Analyze 5-year capital expenditure history
• Review utility bills from the past three years
• Review tax documents, including real estate taxes from the past three years
• Compare realized expenses to the appropriate building data
• Obtain a list of all unfunded capital projects in process
• Review capital improvements and improvement plans
• Obtain current General Ledgers
• Obtain tenant recovery schedule
• Analyze 5-year leasing cost information
• Review 24-month aged receivables

Governmental

Similar to legal, contracts, and insurance due diligence, governmental helps you verify that the property is compliant with jurisdictions and environmental regulations. Additionally, researching and obtaining all necessary licenses and permits promote a smooth transition and helps prevent other legal troubles. Items to investigate here include governmental and environmental regulations and any administrative proceedings.

ITEMS IN GOVERNMENTAL DUE DILIGENCE INCLUDE:

• Research, obtain and verify all necessary licenses and/or permits
• Verify the property’s compliance with governmental and environmental regulations
• Verify no governmental plans or administrative proceedings that may affect the property
• Verify no existing contemplated assessments