Due Diligence in Commercial Real Estate: What Investors Should Review Before Closing

Once a purchase agreement has been executed, one of the most important phases of a commercial real estate transaction begins: due diligence.

Due diligence gives buyers the opportunity to thoroughly evaluate a property, verify information provided during the marketing process, and confirm that the investment aligns with their expectations before closing. Rather than searching for problems, the goal is to gain a complete understanding of the property so informed decisions can be made.

While every transaction is unique, most commercial real estate due diligence follows a similar framework. Understanding what should be reviewed during this period can help investors prepare for a smoother transaction and make more confident investment decisions.

What Is Due Diligence?

Due diligence is the period during a commercial real estate transaction when buyers investigate and verify all aspects of a property before finalizing the purchase.

Depending on the purchase agreement, this review may include:

• Financial records

• Existing leases

• Physical property condition

• Environmental considerations

• Title and survey

• Zoning and land use

• Insurance information

• Financing requirements

  
  

The scope of due diligence varies by property type, investment strategy, and transaction complexity.

Review the Property's Financial Information

One of the first steps is confirming the property's financial performance.

Investors should review:

• Historical operating statements

• Rent rolls

• Net Operating Income (NOI)

• Operating expenses

• Vacancy history

• Capital expenditures

• Utility costs

  
  

Verifying these records helps ensure the property's financial performance aligns with expectations established during the initial evaluation.

Examine Existing Leases

For income-producing properties, lease review is one of the most important components of due diligence.

Key items include:

• Lease expiration dates

• Renewal options

• Rent escalation provisions

• Security deposits

• Tenant responsibilities

• Lease amendments

• Outstanding concessions

  
  

Understanding lease obligations provides valuable insight into future income stability and potential risks.

Evaluate the Physical Condition

A thorough inspection helps buyers understand the property's current condition and future maintenance needs.

Areas commonly reviewed include:

• Roof

• HVAC systems

• Electrical systems

• Plumbing

• Structural components

• Parking areas

• Building exterior

• Interior finishes

  
  

Property inspections can also identify deferred maintenance or capital improvements that may affect future operating costs.

Review Environmental Reports

Depending on the property and its historical use, environmental reviews may be recommended or required.

These may include:

• Phase I Environmental Site Assessments

• Phase II investigations (if necessary)

• Hazardous material evaluations

• Environmental compliance documentation

  
  

Environmental due diligence helps identify conditions that could affect ownership, financing, or future redevelopment.

Confirm Title and Survey

Title review helps ensure ownership can be transferred without unexpected issues.

During this process, buyers often review:

• Ownership history

• Easements

• Encumbrances

• Access rights

• Legal property description

• Existing survey

  
  

Understanding these items helps avoid surprises after closing.

Verify Zoning and Land Use

Buyers should confirm that the property's current and intended use complies with local regulations.

This review may include:

• Existing zoning designation

• Permitted uses

• Development restrictions

• Parking requirements

• Future planning considerations

  
  

Zoning compatibility is especially important for owner-users and redevelopment opportunities.

Review Insurance and Risk Considerations

Insurance requirements should also be evaluated before closing.

Investors may review:

• Existing insurance coverage

• Claims history

• Flood zone status

• Property-specific risks

• Estimated insurance costs

  
  

Understanding insurance obligations helps buyers better estimate ongoing ownership expenses.

Confirm Financing Requirements

During due diligence, financing should continue moving toward approval.

Buyers should verify:

• Loan terms

• Appraisal requirements

• Debt Service Coverage Ratio (DSCR)

• Loan-to-Value (LTV)

• Required documentation

• Closing timeline

  
  

Maintaining communication with lenders throughout this period helps reduce delays.

Organize Findings Before Closing

As due diligence progresses, buyers should organize their findings and determine whether any issues require additional review or negotiation.

This may include:

• Repair requests

• Seller credits

• Updated financial assumptions

• Timeline adjustments

• Contract modifications

  
  

The goal is to ensure buyers fully understand the investment before proceeding to closing.

How We Help Buyers Navigate Due Diligence

Commercial real estate due diligence involves many moving parts, from financial analysis and lease review to inspections, financing, and coordination with multiple professionals.

Our team works closely with buyers throughout the due diligence process to help organize information, identify important considerations, communicate with transaction partners, and support informed decision-making before closing.

Final Thoughts

Due diligence is one of the most valuable stages of a commercial real estate transaction. It provides buyers with the opportunity to verify information, better understand the property, and confirm that the investment aligns with their objectives before completing the purchase.

A thoughtful due diligence process not only helps reduce uncertainty—it also provides the confidence needed to move forward with one of the most important decisions in a commercial real estate transaction.

Written by LevRose CRE with assistance from: LevRoseCRE.(2024)

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