The process of acquiring commercial real estate for your business really starts once you put the property under contract. While you should do preliminary investigations when assessing potential spaces, the certainty of a contract allows you to put forward an effort that will make the most of your new acquisition. Here are some tips to help you make the most of your opportunity for due diligence.
Do Thorough Inspections (Don't Depend on Disclosures)
In many states, either the broker or seller will have to disclose what he knows about the property. A good rule of thumb with disclosures is to use them as a starting point. Honest parties will tell you what they know, but that's all. If it's August in the desert, there's a good chance that no one will know about a gigantic hole in the roof since it hasn't rained. Furthermore, many sellers and brokers intentionally don't look for problems so that they won't have to disclose anything. With this in mind, treat disclosures as a best-case representation of the property and do your own inspections.
Assemble Your Team
Your team of advisors and inspectors should be ready to go the day that you put your potential commercial real estate acquisition under contract. That way, you won't waste any time during the inspection period. Here is a list of some of the people that you need on your team:
- Broker - market information and transaction services
- General building inspector - general overview of the building's condition
- Building system experts (pest, roof, HVAC) - detailed review of systems
- Space planner / architect / engineer - confirm the suitability of the space
- Attorney - review transaction documents and, in some states, title
- Accountant - review operating statements
- Property manager - confirm operating data
Use your advisors for their specific knowledge, but nothing more. If you need to seek specific legal advice, a building engineer won’t be able to help you with that. Invest in the professional knowledge you need to make the most of your due diligence.
Review Documents for Completeness
If your contract has set time frames for your inspection periods, don't let the clock start ticking until you receive every document that you need to analyze the property. That way, you'll have the full amount of time for which you negotiated. Sellers that are aware of this might want you to sign a receipt for the documents that he provided to prove that he complied with the contract.
Quantify Issues
It's not uncommon to find issues with a commercial real estate property during due diligence. Whether your HVAC inspector comes up with problems that the owner never saw or your accountant finds a discrepancy that could reduce the property's income from existing tenants, problems are a part of buying properties. While it's not unreasonable to expect the seller to reduce the price to compensate for the financial impact of the issue, simply asking for a blanket credit won't work. Instead, have your inspectors quantify the cost of repairing the issue, then have your commercial real estate broker work with the other side to negotiate a reasonable adjustment.
Beat Deadlines
The best way to ensure that you have enough time to complete your commercial real estate acquisition due diligence is to complete every task early. If you have 30 days for inspections and plan to finish them within 21 days, you'll have an extra week and a half in the event that you need to send someone out for a repeat inspection.
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