Due Diligence in Commercial real estate

[Umesh Chokshi]

Hello,

Good afternoon everybody !!

I have been doing Residential real estate as Realtor, Investor and Property Manager for last 7 years. I have decided to jump to commercial real estate as an investor. Currently I am considering two Single Tenant properties with 7 years of lease remaining on each of the property. One is national tenant and another one is multi million dollar manufacturing company. Both lease are guaranteed by corporate HQ.

Both properties are above $3.5MN purchase price and I have never purchased property of this price.

I would like to seek advise of an experts from this group that what are the due diligence steps need to be taken for lease validation and this purchase? Is separate attorney required for this? I know lender is asking for Phase I EPA report and appraisal.

Any other suggestion is highly appreciated.

Thanks in advance.

Umesh Chokshi

[Adam Johnson]

Quick thoughts:

• know the creditworthiness of both the tenant as well as the national backer.  You will have to gain comfort in both.
• Are the buildings easily repurposed in the event the single tenant leaves?
• Do you have reserves for if/when one of the tenants leaves to carry the property with zero income until you find a new tenant?  What about any potential build-out cost related to placing a new tenant?
• 7 years remaining on a lease is a bit risky, in my opinion, for a single tenant property.  Consider a 10-year mortgage (unless paying cash) to pay down the mortgage fast enough that you could potentially cash-out refi if the tenant moves out in 7 and you need money to carry it vacant and place a replacement
• Are the properties too unique to be appealing to another occupant?  If they are shaped like a giant igloo, for example, how appealing will that be when trying to attract replacement tenants
• Just because there are only 7 years left on the lease, doesn't mean they won't renew.  Know and understand clearly what terms me already be locked in by a renewal clause in the current lease.
• As far as everything else needed for due diligence - know and completely understand every current and future potential expense/issue with the property.  Trust but VERIFY everything.  Don't worry about offending the seller, you need to turn over every stone
• Know what, if any, systems of the building you are required to maintain (roof, HVAC, plumbing, etc.).  If the tenant is responsible for any or all of these, are they being maintained properly?  What is the age of these systems?  What is the estimated remaining life of them?

This is nowhere near a complete list, but gets you started in the right direction.