Commercial property purchase due diligence

7 Replies

When purchasing commercial property what are your due diligence? 

How do you determine if it's a good deal?

How much does due diligence cost out of pocket? 

What steps can you take before spending money to determine if its worth your time and money? 

Is it best to use a commercial realor or will your buyer's agent do fine? 

What should you look out for and avoid at all cost? 

What type of commercial property? It ranges from free standing stores large and small (for supermarkets to dry cleaners), small strips with several stores, small to large office buildings, mixed use, like a property with stores downstairs and apartments upstairs.

If your just talking stores, I looked at a number of single empty ones and you'll have to figure out why they're empty. Is it because people are going to newer strips nearby? What helped me was I was also looking for laundromats to buy, working with a store broker whose also a commercial realtor. One store, rented to a laundromat didn't do all that well because of traffic patterns, It was just awkward to drive to.

I was looking at a small strip with three stores, all rented, and one to a restaurant. My wife was in city planning, and knew the head of city planning whom she used to car pool with. Decided to drop in and pay him a visit, and we spoke about looking at a strip in town. He knew right away which one it is and asked if the seller mentioned anything about the new rules for providing parking depending on the number of seats in the restaurant. We answered "no".  He said they let the current strip landlord and restaurant tenant slide, but the new owners will have to pave the empty lot behind the strip to provide more parking. The town already spoke to the commercial property owner next store about an easement to get in and out for the additional parking. The sellers mentioned they knew nothing about it.

Talking about city planning, they're good folks to know if you plan to invest in a certain area. City planning usually have a master plan which for an investor is good to know.

For stores rented to businesses such as  dry cleaners, are there any contamination issues, past or present, which greatly diminishes the value and imposes liabilities for current and past owners?

There are insurance issues. My dad owned a mixed use properties, and commercial insurance varied greatly, so if he rented the store as an office, the insurance on it could be five time greater if it was rented to a restaurant.

These are just a few examples. You can do very well with commercial but there's a lot more issues you have to know and look into. 

Originally posted by @Frank Chin :

What type of commercial property? It ranges from free standing stores large and small (for supermarkets to dry cleaners), small strips with several stores, small to large office buildings, mixed use, like a property with stores downstairs and apartments upstairs.

If your just talking stores, I looked at a number of single empty ones and you'll have to figure out why they're empty. Is it because people are going to newer strips nearby? What helped me was I was also looking for laundromats to buy, working with a store broker whose also a commercial realtor. One store, rented to a laundromat didn't do all that well because of traffic patterns, It was just awkward to drive to.

I was looking at a small strip with three stores, all rented, and one to a restaurant. My wife was in city planning, and knew the head of city planning whom she used to car pool with. Decided to drop in and pay him a visit, and we spoke about looking at a strip in town. He knew right away which one it is and asked if the seller mentioned anything about the new rules for providing parking depending on the number of seats in the restaurant. We answered "no".  He said they let the current strip landlord and restaurant tenant slide, but the new owners will have to pave the empty lot behind the strip to provide more parking. The town already spoke to the commercial property owner next store about an easement to get in and out for the additional parking. The sellers mentioned they knew nothing about it.

For stores rented to dry cleaners, are there any contamination issues which greatly diminishes the value and imposes liabilities for current and past owners?

There are insurance issues. My dad owned a mixed use properties, and commercial insurance varied greatly, so if he rented the store as an office, the insurance on it could be five time greater if it was rented to a restaurant.

These are just a few examples. You can do very well with commercial but there's a lot more issues to look into. 

It's a free standing building  that's currently a salon. The plan is  to lease it out to a salon owner. Is 911 sq ft with a basement. What information/documents should I request from the current owner to base some of  my numbers off when analyst the deal? Thanks

It appears the building is currently vacant, For all properties, particularly commercial, you'll have to check with the municipality if their are any violations and current zoning. Ask the seller how much rent he was charging. I'm not into the hair salon business, so I don't know if there particular issues associated with it, such as the use of chemicals.

Also contact store brokers in your area to see what something like this rents for. When I was looking at laundromats a while back, I worked with a store broker and knew why a certain location works, and why others don't. You certainly need one that gives you such insight.

My dad had barber shops he rents to and he had to check with brokers when vacancies occur. One of the major issues for me is a commercial vacancy takes six months or more to fill, up to a year sometimes, and with one free standing store, you'll have to cover mortgages and taxes in the meantime. If you have two stores, like my dad, or more, it's easier to financially manage.

Your asking the right questions, in general commercial due diligence varies from residential in the fact that you not only have to make sure the building itself is in acceptable condition but also confirm there are no other outside mitigating factors that could adversely effect the investment. 

As mentioned by @Frank Chin   you will want to make sure that the properties zoning allows for your intended use, you can find zoning definitions on the county website.

You will also want to confirm all tax/insurance information provided by the Seller. How much are taxes? are they delinquent (which would create a tax liability for you), how much will your insurance be and more importantly are there any outstanding insurance claims/liabilities with the current owner? 

Also mentioned by Frank is the potential for contamination. Ensuring the property is clean environmentally might be the most important due diligence item; if you purchase a dirty site - REGARDLESS OF RESPONSIBILITY - you automatically assume all liability for said contamination. Worst case scenario the health of your customers is effected but if it contamination is discovered the state may look to you to clean it up, which is far from cheap. A simply Phase 1 report will tell you all you need to know and will probably cost $1,000.00 for a small retail location. Generally speaking I would say you have nothing to worry about given the product type but you still need to have the report done. 

Obviously you will want a building inspection done (same as when you buy a house), which ranges in price but shouldn't be more than $2,000.

For items you can do before hand I would recommend checking on the zoning and also be certain that you can rent the space for enough money to get your desired returns; this can be done by talking with your potential tenants or even walking into neighboring business and asking how much they pay in rent. 

A commercial broker who specializes in retail can manage the whole process for you, a good broker will also be able to tell you about market lease rates and how long you should expect lease-up time to take. 

Good luck!

Originally posted by @Taylor Hazard :

Your asking the right questions, in general commercial due diligence varies from residential in the fact that you not only have to make sure the building itself is in acceptable condition but also confirm there are no other outside mitigating factors that could adversely effect the investment. 

As mentioned by @Frank Chin   you will want to make sure that the properties zoning allows for your intended use, you can find zoning definitions on the county website.

You will also want to confirm all tax/insurance information provided by the Seller. How much are taxes? are they delinquent (which would create a tax liability for you), how much will your insurance be and more importantly are there any outstanding insurance claims/liabilities with the current owner? 

Also mentioned by Frank is the potential for contamination. Ensuring the property is clean environmentally might be the most important due diligence item; if you purchase a dirty site - REGARDLESS OF RESPONSIBILITY - you automatically assume all liability for said contamination. Worst case scenario the health of your customers is effected but if it contamination is discovered the state may look to you to clean it up, which is far from cheap. A simply Phase 1 report will tell you all you need to know and will probably cost $1,000.00 for a small retail location. Generally speaking I would say you have nothing to worry about given the product type but you still need to have the report done. 

Obviously you will want a building inspection done (same as when you buy a house), which ranges in price but shouldn't be more than $2,000.

For items you can do before hand I would recommend checking on the zoning and also be certain that you can rent the space for enough money to get your desired returns; this can be done by talking with your potential tenants or even walking into neighboring business and asking how much they pay in rent. 

A commercial broker who specializes in retail can manage the whole process for you, a good broker will also be able to tell you about market lease rates and how long you should expect lease-up time to take. 

Good luck!

Good information, thanks for your input. Very helpful! 

Originally posted by @Frank Chin :

What type of commercial property? It ranges from free standing stores large and small (for supermarkets to dry cleaners), small strips with several stores, small to large office buildings, mixed use, like a property with stores downstairs and apartments upstairs.

If your just talking stores, I looked at a number of single empty ones and you'll have to figure out why they're empty. Is it because people are going to newer strips nearby? What helped me was I was also looking for laundromats to buy, working with a store broker whose also a commercial realtor. One store, rented to a laundromat didn't do all that well because of traffic patterns, It was just awkward to drive to.

I was looking at a small strip with three stores, all rented, and one to a restaurant. My wife was in city planning, and knew the head of city planning whom she used to car pool with. Decided to drop in and pay him a visit, and we spoke about looking at a strip in town. He knew right away which one it is and asked if the seller mentioned anything about the new rules for providing parking depending on the number of seats in the restaurant. We answered "no".  He said they let the current strip landlord and restaurant tenant slide, but the new owners will have to pave the empty lot behind the strip to provide more parking. The town already spoke to the commercial property owner next store about an easement to get in and out for the additional parking. The sellers mentioned they knew nothing about it.

Talking about city planning, they're good folks to know if you plan to invest in a certain area. City planning usually have a master plan which for an investor is good to know.

For stores rented to businesses such as  dry cleaners, are there any contamination issues, past or present, which greatly diminishes the value and imposes liabilities for current and past owners?

There are insurance issues. My dad owned a mixed use properties, and commercial insurance varied greatly, so if he rented the store as an office, the insurance on it could be five time greater if it was rented to a restaurant.

These are just a few examples. You can do very well with commercial but there's a lot more issues you have to know and look into. 

 Thanks! 

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