{"id":161109,"date":"2023-10-25T14:55:22","date_gmt":"2023-10-25T20:55:22","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=161109"},"modified":"2023-10-25T14:55:24","modified_gmt":"2023-10-25T20:55:24","slug":"commercial-real-estate-due-diligence","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/commercial-real-estate-due-diligence","title":{"rendered":"What Real Due Diligence Looks Like On Commercial Assets"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Investing in real estate comes in many different shapes and sizes. Most people focus primarily on residential real estate throughout their real estate investing journeys, which include single-family homes, condos, and small multifamily properties. Other investors choose to take the leap into&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/rookie-276\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">investing in commercial real estate<\/span><\/a><span data-preserver-spaces=\"true\">, which can be very intimidating at first.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Over the past few years, I became one of those investors who took the plunge into commercial real estate. My first deal was a 2,000-square-foot medical building, and my second was a much more intimidating 7,000-square-foot office condo unit.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">After having bought, rented, and sold both of these properties, my biggest takeaway is that commercial real estate investing is very similar to residential real estate, with one big exception: the due diligence period, which provides a lot of possible ways to mess up.<\/span><\/p>\n\n\n\n\n\n\n  <div class=\"lg:block\" x-data=\"{ ad_block_block_65398024f4464: popAds(1) }\">\n      <template x-for=\"ad in ad_block_block_65398024f4464\">\n        <a\n          :href=\"ad.linkURL\"\n          class=\"no-underline text-black\"\n          x-on:click=\"adClicked('https:\/\/www.biggerpockets.com\/blog\/commercial-real-estate-due-diligence', ad.sponsor, ad.title, ad.id, 'blockAdClicked', 'blockAd', '')\"\n          target=\"_blank\">\n          <div\n            class=\"py-4 border-b flex flex-col flex-nowrap text-sm border-t px-0 rounded-none\"\n            x-init=\"\n              analytics.track('blockAdLoaded', {\n                referrer: 'https:\/\/www.biggerpockets.com\/blog\/commercial-real-estate-due-diligence',\n                sponsor: ad.sponsor,\n                ad_title: ad.title,\n                ad_page_location: ''\n              })\n            \"\n            x-intersect:enter.once=\"adViewed('https:\/\/www.biggerpockets.com\/blog\/commercial-real-estate-due-diligence', ad.sponsor, ad.title, ad.id, 'blockAdViewed', 'blockAd', '')\">\n            <div><span class=\"text-xs text-slate-light block bg-slate-50 p-1 inline-block rounded-md\">Sponsored<\/span><\/div>\n            <div class=\"flex items-center text-sm space-x-4\">\n                <img :src=\"ad.imageURL\" :alt=\"ad.imageAlt\" class=\"h-10 w-10 object-cover rounded-full\">\n\n                <div clas=\"text-sm\">\n                    <span class=\"font-bold block\" x-text=\"ad.sponsor\"><\/span>\n                    <span class=\"text-slate\/80\" x-text=\"ad.description\"><\/span>\n                <\/div>\n            <\/div>\n\n            <div>\n                <span class=\"font-bold\" x-text=\"ad.title\"><\/span>\n                <p class=\"mt-2 text-slate\/80\" x-text=\"ad.body\"><\/p>\n                <span class=\"mt-2 text-themeBlue block mt-2 underline\" x-text=\"ad.linkTitle\"><\/span>\n            <\/div>\n          <\/div>\n        <\/a>\n      <\/template>\n  <\/div>\n\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Pursuing a Commercial Property<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">The process of buying a commercial property starts with standard market research and financial&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/real-estate-investment-analysis\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">analysis<\/span><\/a><span data-preserver-spaces=\"true\">. Before you even write an offer, consider the location you will be buying. When picking a location, you need to look at demographics, market trends, inventory, and demand.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Unlike residential investing, your options are quite broad when pursuing a commercial property. Property types include:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Industrial<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Medical<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Multifamily<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Office<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Retail<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Self-storage<\/span><\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">There are pros and cons to each of these different asset classes, and deeply understanding your market is critical to ensuring you pick the type of property that meets your budget and risk tolerance.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">In addition, the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/triple-net-leases-commercial-real-estate\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">structure of leases on commercial properties<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;is very different from residential leases. The biggest reason for this is that when buying a commercial property, your tenant will be a business compared to an individual, a couple, or a family.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Making the Offer<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Once you identify the area where you want to invest and the type of property you would like to buy, and you find a specific property that meets your expectations, it\u2019s time to make an offer.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Making an offer on a commercial property starts with an LOI (letter of intent). These LOIs are used to negotiate mutually agreeable terms with the buyer and seller, including the purchase price, earnest money deposit, and buyer contingencies.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Often, the LOI will be passed back and forth several times before both parties agree on terms that meet their expectations. Once both parties agree, the deal is formalized with a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/understanding-real-estate-purchase-agreements\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">purchase contract<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Navigating this phase and the next phase of the process will be more complex than you\u2019re used to. Writing an LOI, submitting an offer, and entering due diligence should all be handled with the direction of a qualified commercial&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/what-is-a-real-estate-broker\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">real estate broker<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;and a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/why-you-need-a-real-estate-attorney\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">real estate attorney<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Due Diligence (AKA Feasibility)<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Much like a residential transaction, when both parties execute a purchase contract, the title company will open&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/what-is-escrow-and-how-does-it-work\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">escrow<\/span><\/a><span data-preserver-spaces=\"true\">. This starts the clock on your due diligence window, which in commercial transactions is more commonly referred to as your \u201cfeasibility\u201d period.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">The feasibility period in a commercial real estate transaction is a very important phase where you, the buyer, will conduct in-depth due diligence on the property, tenant, and financials to determine whether the deal meets your investment objectives. This window of time works similarly to your due diligence window on a residential transaction, but it is much more involved.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Your priorities during the feasibility period will include the following.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Inspecting the property<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">This sounds straightforward, and it is. You need to engage qualified inspectors to thoroughly inspect the subject property. Just like when buying a house, your inspector will inspect the physical condition of the building, look for structural issues, and review the state of the major systems like plumbing, electrical, and HVAC.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Reviewing financial records<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">The financial records of the property should all be made available to you as soon as you open escrow. This includes tax statements, lease agreements, P&amp;L statements, and a balance sheet. This package should give you a better grasp of the property\u2019s financial picture.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Some owners aren\u2019t the best at bookkeeping, so there might be some holes in the information provided to you. It will be up to you as the buyer to fill in the gaps and determine if the deal still meets your expectations from a financial standpoint.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Tenant interviews<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">If there is a tenant (or tenants) in place, ask your broker if it is customary to do a tenant interview in your market. This will help you get a better grasp on how the tenant feels about the building and their lease and whether they will be likely to renew when their lease expires.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Title report<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">You will receive a title report from the title company, and it is really important to review this report to understand if there are any encumbrances,&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/what-is-a-lien\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">liens<\/span><\/a><span data-preserver-spaces=\"true\">, disputes, CC&amp;Rs, or easements. Any of these items could affect your ownership or future property use.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Obtaining financing<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">By now, you should already have a few lenders lined up who would be willing to finance this deal. During your feasibility window, though, you will need to provide all of your financial documents to your lender and get final approval on your loan. The last thing you want as the buyer is to be a week away from closing only to have your financing fall apart.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Attorney review<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Engage a real estate attorney early to help review&nbsp;<\/span><em><span data-preserver-spaces=\"true\">all&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">legal documents related to this transaction. They should be looking at the purchase agreement, contracts, lease agreements, and financial statements. Your attorney will ensure your legal interests as a buyer are protected.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Resale consideration<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">During this feasibility period, you should also consider the property\u2019s potential for resale in the future. Talk with your broker about the market trends, appreciation potential, and factors that might influence the property\u2019s future market value.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Closing on the Deal<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Commercial real estate transactions, from start to finish, tend to drag out longer than residential transactions.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">In my experience, I was given a 30-day feasibility window (compared to a 10-day due diligence window on my residential transactions), and then I was given 60 days after offer acceptance to close. That gave me plenty of time to complete my due diligence and get my financing in order prior to closing.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">The due diligence window can be overwhelming and make commercial transactions daunting, but it shouldn\u2019t scare you away from doing a commercial deal. If you have some residential experience under your belt and the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/team-members-property-management\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">right team<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;by your side, you\u2019ll find the process to be pretty straightforward.<\/span><\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_98c2b9a4683f3293a3e80b22b972149a\" class=\"visibility-group alignwide  hidden\">\n        \n\n<div id=\"hero-block_1c48dc565063ca8e99db0f606470a0e6\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-slate-200-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-1\/2 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-slate-800-color has-text-color has-large-font-size wp-block-paragraph\" style=\"font-style:normal;font-weight:800\">Find the Right Agent, Close the Best Deal<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color wp-block-paragraph\" style=\"font-size:18px\">Step #1: Use Agent Finder to match with top <em><strong>investor-friendly<\/strong><\/em> real estate agents to help you find, analyze, and close your next deal.<\/p>\n\n\n\n<div id=button-custom-event-block_7567cdf3e97f2c881e611dc2e99baf97 class='button-custom-event'>\n      <a\n    href=\"https:\/\/www.biggerpockets.com\/agent\/match\"\n        x-on:click=\"window.analytics.track('Blog Block | B2C Marketplace Agent Finder', {\n      referrer: 'https:\/\/www.biggerpockets.com\/blog\/commercial-real-estate-due-diligence',\n    });\"\n    class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Find an Agent<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/2 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/Marketplace-Blog-Blocks-Agent-v3.png\" alt=\"investor friendly real estate agent\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color wp-block-paragraph\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a\n    href=\"https:\/\/www.biggerpockets.com\/signup\"\n        x-on:click=\"window.analytics.track('Blog Block | Acquisition | Free Membership Signup', {\n      referrer: 'https:\/\/www.biggerpockets.com\/blog\/commercial-real-estate-due-diligence',\n    });\"\n    class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Due diligence is essential to all real estate transactions, but commercial properties, in particular, are extra tricky. Here&#8217;s what you need to know.<\/p>\n","protected":false},"author":613703,"featured_media":157918,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5527],"tags":[],"class_list":["post-161109","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-commercial-real-estate-investing"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/161109","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613703"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=161109"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/161109\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/157918"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=161109"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=161109"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=161109"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}