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Due Diligence

So you found your perfect office and/or warehouse. It is the right square footage, has adequate ceiling heights and yard area and is in a good location. You just went under contract at the Title Company. Now what?
Now the real important work begins. There will almost always be several buildings that fit your requirement, however finding the one with few to no issues is a different story. Many brokers feel their work is done once the property is under contract. This is far from the truth. A good commercial broker shines once the contract clock starts ticking.

Free items first

While there are numerous due diligence items which have to be handled, I always put the questions on the top of the checklist which won’t cost my client anything to get answered. That way if my Buyer can’t live with these he won’t waste money on phase one environmental studies, appraisals and further attorney fees.

Physical inspection of the property is more than just looking at the obvious components of the warehouse and or office as the roof, structure, paving, electrical and mechanical systems. The ones that can be missed are indications of standing water near the building which may be caused from poor drainage. Does the roof drain to one side or does it collect in the middle of the building in a gutter, which may be problematic. If you have an office building, do you have enough parking, adequate and efficient HVAC? Does the building meet ADA codes? If an office warehouse, is the truck court adequate, is there enough power, is the rail siding up to the rail provider’s specs? The structural, MEP and environmental studies should be handled by licensed professionals…however they often miss issues. A second set of eyes is important.

Documents contained in the Seller deliveries and the title commitment are the first to get tackled. While attorney consultation is a must with contract and commitment review, a quality broker can make valuable suggestions that an attorney may miss and then can evaluate. The title commitment should provide copies of any recorded deed restrictions on the property which may be problematic. At this stage local zoning should also be confirmed for the same reason. Encumbrances evidenced in the commitment may also be revealed such as an easement which may prohibit the Buyers intended use. Again a good real estate attorney is important at this point.

Property Survey
After the initial review of the seller deliveries and tile commitment a good boundary survey is necessary to confirm recorded easements and sometimes will catch unrecorded easements and encroachments. The property survey is a cost to either the buyer or seller and becomes a negotiable item of the transaction.

The survey should indicate all improvements on the property, utility easements, fire hydrants, fences, curb cuts and much more. Your lender will most likely require a survey in order for them to lend money on the property. A buyer wants be sure he is getting the same amount of dirt which is being represented. A survey is critical.

Phase One Engineering Study
Having seen more than a few contaminated properties, I can tell you first hand…you don’t want to be involved in owning one. The environmental study will look for any documented releases on your property or in the vicinity of contamination, letters of closure from your state agencies, UST’s (underground storage tanks), etc.

Historical aerial photos will show previous uses of the property which may be suspicious. Materials used in the property may prove expensive to remediate, such as asbestos in floor tiles, insulation and walls.

A buyer should always hire an attorney for the docs and survey review and relative professionals to do specific inspections.

These are some of the most basic items of due diligence. A fully exhaustive list and relative explanation would take many pages. This is one of many reasons why you need to utilize an experienced commercial real estate broker when purchasing or leasing office or industrial property.