Understanding Real Estate Due Diligence
A commercial real estate transaction differs from a residential transaction. Residential real estate has some safeguards built in—such as the requirement that the owner/seller disclose any known material defects. When it comes to commercial real estate transactions, though, each party involved may need to conduct their own due diligence on several fronts.
Depending on which role you’re playing in a commercial real estate transaction, your focus may change a bit, but due diligence will always be an important step.
If you are hoping to enter into a commercial real estate transaction in St. Petersburg, Florida, or anywhere in the Greater Tampa Bay Area, contact me at Silvestri Law, P.A. I am a commercial real estate attorney who has been helping buyers, sellers, landlords, and tenants for decades conduct their due diligence to make sure the deal is right for them. Reach out with all your questions and concerns.
What Is Commercial Real Estate Due Diligence?
Three main areas of “doing your homework,” or conducting due diligence, in a commercial real estate transaction are physical, financial, and legal. Depending on the role you have in the transaction, your focus in these areas might be a bit different.
PHYSICAL DUE DILIGENCE: Physical refers to the material condition of the property. Whereas in residential real estate, buyers must disclose any known defects, that is not the case with commercial real estate. However, if you’re buying or even leasing a commercial structure and it turns out to have defects, you may be able to resort to claiming fraud, so a landlord or seller should be open about any adverse conditions. Still, you as a tenant or buyer must perform your due diligence.
Physical due diligence for a buyer or renter refers to inspecting the property. This is generally best done through the services of a professional inspection company, which can check not only for physical issues, but also conduct a building/property risk assessment, calculate replacement cost estimates, and undertake facilities management reviews and analyses. The inspection should also include checking all the physical systems, such as electrical, fire suppression, and HVAC (heating, ventilation, and air conditioning).
Other physical considerations include checking the availability and reliability of electricity, water, sewage, and high-speed Internet access.
FINANCIAL: Finances figure into every player’s due diligence in a commercial real estate transaction. If you’re a buyer, you need to review the seller’s financial statements regarding the property, especially if it is already being leased. Do the tenants pay on time? How much is the owner spending on upkeep and repair? If you’re the seller, you need to check the finances of the would-be buyer. Do they have the assets to close the deal? What financing arrangements have the prospective buyer arranged for a loan to close the deal?
Prospective buyers and tenants must also do their due diligence on finances. Do the terms of the lease or the price of the property make sense?
LEGAL: On the legal front, several issues can be involved. From the perspective of a buyer or tenant, is the property zoned for the purpose you have in mind? Are there certain ordinances or permitting requirements that might make it difficult to conduct the type of business you have in mind? Are there any environmental concerns that could block your intended purpose?
Beyond these practical considerations, a buyer must also do a title search to discover if there are any outstanding liens or encumbrances on the property. A survey of the property should also be conducted to make sure there are no issues with easements, covenants, restrictions, or other boundary disputes.
Timeline for the Due Diligence Process in Florida
Generally speaking, the buyer and seller in a commercial real estate transaction should agree to a “due diligence period.” This will generally last from 30 to 60 days, and the seller should require a confidentiality and/or early access agreement, in addition to or as part of a purchase contract. The purchaser can during this period also pursue confirmation of zoning and/or permitting approvals.
The due diligence period will also generally require a good faith deposit by the prospective buyer, along with a provision for a “right to terminate” if at the end of their due diligence they decide the property does not meet their standards or intended purpose. During this period, the seller should provide all pertinent documents pertaining to the property, including tax bills, leases, financial statements, service contracts, and more.
Professional Legal Counsel: Silvestri Law, P.A.
The level of due diligence will vary with each type of transaction and with the role each party is playing in the transaction—buyer, seller, tenant, landlord—but due diligence is always extremely important. You want to make sure the deal is the right fit for you on all fronts: financial, legal, and physical.
In St. Petersburg and the Greater Tampa Bay Area, contact me at Silvestri Law, P.A. to help you through the commercial real estate due diligence process. I’m ready to guide you toward the best deal possible.