An Overview of the Due Diligence Period in a Commercial Real Estate Transaction

If you’re in the middle of a commercial real estate transaction, there are a lot of steps you need to take. One of them is due diligence, which is an essential and comprehensive stage of any commercial real estate transaction. 

Due diligence is the process of investigating the physical condition of the property along with matters that may affect its use or obtaining property title.  It typically takes place over a 30-60 day period. Although sellers have a duty to disclose known defects and problems, the buyer bears the responsibility of actually assessing the property to make sure there aren’t any previously unknown issues. For this reason alone, it’s recommended that you invest in commercial property with an attorney’s help.

What Steps Do You Need to Take?

Do a Title Search

Whether you’ve already purchased commercial real estate in the past or this is your first time, one of the most important steps is to perform a title search to confirm that the chain of title is clean and that the seller actually does own the property. A title search will also show whether there are any liens or encumbrances that will affect the value and usability of the property.

Environmental Inspection

The next step is likely to be an environmental inspection, which examines past uses of the property and the surrounding vicinities to look for environmental problems or liabilities. You will most likely be required to provide this information by the lender if you are financing the property.  

The purpose of this inspection is to detect hazardous materials on or around the property that could make it unsuitable for its intended use. If anything is discovered, you can ask the seller to correct it or negotiate with them to factor in any remediation costs.

Land Use and Zoning

During the due diligence process, it is also important to confirm the land use and zoning designations of the property. As a result of this review, you will be able to confirm and ensure that the new piece of real estate can actually be used as you intended.

For example, you may be purchasing a storefront and plan to open up a small eatery with a patio in the back.  However, the local code may not permit a food service establishment or patio, requiring separate approval from the county and/or a municipality. In some cases, there may be fees involved in changing a property’s intended use.

Lien Search

When you close on a property, whether it’s a house or a commercial building, a municipal lien search helps you avoid unknown fees and costs. This search will reveal any unrecorded liens, code violations, outstanding utility or tax bills, open or expired permits, or special assessments.

Conclusion

By conducting proper due diligence on the property, you will be able to decide whether to move forward with the purchase. If issues arise, you may be able to negotiate a reduction in the sale price or have the seller complete any necessary repairs at their expense. At the Florida Small Business Center, we can help you grow your business by guiding you through the legal aspects of a commercial real estate purchase. To speak to a business lawyer today, call 1-866-842-5202.