Due Diligence

Commercial Real Estate Due Diligence Guidelines

Commercial Properties-Inspection Guidelines

When buying commercial properties, due diligence is even more important than it is with residential properties. That’s simply because there’s so much more money at stake. In the worst case, unexpected repairs and expenses can empty your pockets in the blink of an eye. At the other end of the scale, it can create a long-term and slow-motion drain on your bank account that ends up with the same result-money gone and a clunker property on your hands.

I’m sure you can see my point-never, ever acquire a commercial property without closely checking its condition first. By doing that, you’ll end up with an investment which can produce considerable profit and appreciation over the long-term. In this article, I’ll outline the basic due diligence required for the physical inspection of commercial buildings.

Who Should Inspect Commercial Buildings

If you’re new to commercial investments, then definitely hire a professional to inspect the building you’re considering. The building structure and the HVAC, electrical and plumbing systems are much more complicated than those found in residential properties and require specialist inspectors.

Therefore, it’s wise to hire an experienced contractor, architect, or other expert to do the jobs for you. Verify references and contact other investors to see what kind of job the specialists have done for them so you can hire the best.

When you work with specialists that do a great job at reasonable prices, treat them well and fairly. Remember, your reputation is everything, especially in the commercial or industrial market, so you want to guard it at all costs. Getting a bad reputation in the commercial market is a particularly deadly sin since it can dry up funding sources in a hurry, not to mention the fact that “movers and shakers” will not want to work with you.

Maintenance Types

There are two types of maintenance in commercial and industrial investments. One is deferred maintenance. This refers to any major or minor defects in a building.

Naturally, you want these defects exposed before you invest any money in a building. For example, one of the first things to have checked is the condition of the roof. The damage caused by water leaks to electronics and wiring can create some very expensive repair bills.

The other type of maintenance is routine. Just what it sounds like, this is such regular activity as cleaning, painting, servicing of HVAC, escalators, elevators, fire safety systems, etc. Since laws require regular maintenance, check all the building logs to make sure routine checkups have been completed, but don’t take the log entries for granted! Always talk to the companies doing the maintenance to ensure the work was really done.

If you’ve already found that equipment hasn’t been kept in great shape, hire a different company to do inspections to make sure that you’re getting objective opinions. Talk to the tenants as well to get their opinions of the maintenance. This is not only a chance to get a realistic picture of the building, but it’s also a chance to build good relationships with them should you decide to purchase the property.

Routine Items You Can Check Yourself

Quite often, defects are obvious and don’t need the trained eye of a professional inspector. During a walk-through, you can check for the following items:

Ceilings-look for evidence of stains or broken tiles that indicate leaks from the roof. *

Walls-check for significant cracks caused by uneven settlement of the foundation.

Floors-warping or cracks can indicate problems with the way they were laid or with the foundation.

Rest rooms-check out the condition of the plumbing to make sure it’s not leaking, rusted, or otherwise not performing property.

Security components-these should all be functioning properly; e.g. doors lock as they should, exit signs are illuminated, stairways are in good shape, etc.

Lighting-interior and exterior. All lights should be working.

Door hardware-by this, I mean automatic and/or hydraulic door openers and closers should be functioning well.

Paint-at points like common areas, check to see if the paint is in good shape and doesn’t show peeling, “alligatoring,” and the like.

Tenant spaces-check their condition very carefully. After all, if they’re not in great shape, the tenants will want you to fix them up once you take ownership of the building. Make a list of maintenance/repair items and get bids from contractors to see what the costs will be.

Grounds-check to see what kind of shape they’re in. This not only includes landscaping, but the condition of parking lots, curbs and the like.

Red Flags

Never put your money into any property with one or more of the following problems: Asbestos, Dry rot, Duct contamination, Hazardous waste pollution, Lead contamination, Mold, etc.

If you find these problems, cancel the escrow and look elsewhere! You want to buy a profitable property, not a money pit.

Purchase Agreement Recommendations

Always write a condition into the agreement that requires the seller to do one of two things before the close of escrow: Correct all problems, or Lower the price so you can do the repairs. The advantage of this strategy is that you can hire your own contractor to do the repairs, and you’ll know they’ll get done correctly.

What To Do Once You’ve Purchased the Commercial Building

Once you’ve bought the building, you want to keep it in the best shape possible at the lowest cost possible. For office buildings, your “foot soldiers” in the maintenance war are the maintenance staff. Make sure they understand their duties clearly and carry them out on a regular, scheduled basis.

If you have an industrial property, shopping center or similar property, then your manager should oversee the maintenance staff.

Maintenance Costs How to Pay for Them

Maintenance may seem expensive, but it’s a lot less expensive than having those income-producing tenants bail on you because you’ve let the building run down. The tenants should pay for these costs through the lease. As long as the expense is reasonable, they’ll be happy to pay for maintenance and repairs since it directly affects their bottom lines.

Key Idea: Never, ever acquire a commercial property without checking its condition thoroughly first!

By: Jack Sternberg

About the Author:


Jack Sternberg is a nationally recognized expert on real estate investment and the creator of the renowned “Buyers First Program” who’s been in the business for more than 30 years. Sternberg’s deals have totaled over $750 million and he’s been to the closing table more than 1,500 times. For more, visit http://www.askjacksternberg.com

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Due Diligence for Investment Property Selection

It is important to understand the factors that control and affect the market that you intend to enter. The purpose of this topic is so that you have a reasonably good idea of the area and property you are thinking of buying so that you can make a good, informed purchase decision. It is not that hard but does take a little time. However, don’t fall into the trap of analysis paralysis. You can overanalyze to the point of never taking action. That is not the intent of this chapter.

All investment property purchases need to have due diligence conducted prior to the purchase. To develop a systematic approach for due diligence, asking the following questions is highly recommended:

Property Management

What is the vacancy factor?

What is the economic rent?

How long will it take to rent?(estimated)

Economic Area of Influence

What are the guiding economic factors that drive the value?

What is the sustainable source of economic growth in the area?

Who are the potential tenants, i.e. high tech, professional, blue collar, etc?

Demographics

What has attracted the prospective tenants to this area? (job growth, retirement)

Is this a resort community or a stable sustaining community?

Are your tenants students; singles; families w/children?

Analysis of Income/Expenses

Follow-up on selected strategy for investing

Determine your property analysis indicators

Strategy for increasing income/ decreasing expenses.

Appeal of Property

General feeling about the area

Convenient driving distances to work/school/recreation

Possibly family oriented

Due Diligence Checklist

Here is a list of things you will want to know before signing a purchase agreement. Not all of the items will be pertinent to every property. If you have questions, don’t hesitate to call on professionals to help you. This is an important step in your purchase decision.

1. Current rent roster with paid to dates

2. List of security deposits

3. Mortgage payment information

4. Personal property list

5. Floor plans

6. Insurance policy and agent information

7. Maintenance and service agreements

8. Tenant information: leases, ledgers cards, applications, smoke detector forms

9. List of vendors and utility companies, including account numbers

10. A statement of structural alterations made to the premises

11. Surveys and engineering documents

12. Commission agreements

13. Rental or listing agreements

14. Easement agreements

15. Development plans, all plans and drawings

16. Governmental permits or zoning restrictions

17. Management contracts

18. Tax bills and property tax statements

19. Utility bills

20. Cash receipts and disbursement journals for property

21. Capital expenditures for the last 5 years

22. Income and expense statements for two years

23. Financial statements and tax returns for the property

24. Termite inspection reasonably acceptable to the buyer

25. All other records helpful to the ownership of the property

26. Market surveys or area studies

27. Construction budgets or actuals

28. Tenant profiles

29. Work order files

30. Bank statements for operating accounts

31. Certificates of occupancy

32. Title abstract

33. Copies of surviving guarantees and warranties

34. Phase I environmental audit

Enjoy your investing and do you DUE DILIGENCE!

By: Ellis San Jose

About the Author:


© Ellis SanJose, 2007 http://www.networthu.com . All rights reserved.

ABOUT: Find out how two historically profitable markets are joining to create millions. Real Estate investing + Network Marketing. Now is your chance to learn from the pros. For more information go to http://www.networthu.com

Ellis began learning about real estate investing at a very early age. Growing up in Southern California, his father taught him the skills of rehabbing & renting properties. While attending college, Ellis worked for a partnership group that was a major real estate player in Los Angeles County during the 1980’s. They specialized in purchasing foreclosures at the courthouse steps. Ellis was instrumental in their success, by growing their portfolio from 10 properties to 200 in three years. In 1994, he changed careers & became a licensed securities broker. Ellis has devoted his time investing in many types of distressed assets, single family homes, commercial properties, & non-performing trust deeds. He has been involved in over 60 real estate transactions totaling over $30 million dollars.

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