A Due Diligence Checklist for Commercial Real Estate Transactions By David Earl Morgan

Due diligence is the process of evaluating the commercial property that you have under contract by checking and confirming information about that property. The importance of due diligence is twofold:

First, you learn specifics about the property which enables you as the Buyer to make an informed decision.

Second, it allows you to uncover potential problems before closing escrow.

The due diligence clause in the Letter of Intent to Purchase allows the Buyer to analyze the property for a free period of time, typically 30 to 60 days.

Here is a sample Due Diligence Checklist which should be submitted as an Exhibit to the Letter of Intent to Purchase and referred to in the paragraph outlining the due diligence to be conducted.

DUE DILIGENCE CHECKLIST

PRIORITY:

____ Preliminary title report and all underlying documents
____ Existing title insurance policy and underlying documents
____ Existing survey of Property

REQUIRED:

____ Current rent roll indicating lease terms, rental rates, concessions granted, renewal options, security deposits, and any outstanding delinquencies or prepayments
____ A list of tangible personal property owned by Seller and used in connection with the ownership, operation, use and maintenance of the Property
____ Current ad valorem tax bills and property tax statements
____ Historical financial and/or operating statements for the prior three years and current year-to-date statements
____ Maintenance/service contracts and agreements and any other contracts relating to the ownership, operation and maintenance of the Property including the standard lease form, pest control, janitorial, and landscape maintenance contracts and agreements
____ Liability Insurance Policy and claims records
____ Capital expenditure records for the past five years
____ Utility bills for the preceding twenty-four month period
____ List of vendors and utility companies with account numbers
____ Certificates of Occupancy - building and tenants

OTHER:

____ Payroll summary for on-site employees
____ Phase I, II, and/or III Environmental Report
____ Reports, records, and documentation relating to Mold, Mildew and Fungus repairs made to the Property
____ All governmental permits or zoning restrictions affecting the Development and occupancy of the Property
____ Mortgage payment information (if loan is assumable)
____ Assumption papers from lender
____ Permitted and As-Built Building Plans - including Architectural, Structural, Mechanical, Electrical, Plumbing, Fire sprinklers, Landscaping and Civil Engineering
____ Floor plans
____ Site plan
____ Tenant profiles or surveys, if available
____ Traffic study or report
____ Move Out Notice(s)
____ Most recent appraisal
____ Most recent engineering report
____ Statement of structural alterations made to premises, with plans and permits
____ Guarantees and warranties on roofs, and any other portions of the structure or facilities; major repairs, etc.
____ Roof inspection reports
____ Market surveys or studies of area or comparable properties
____ Brochures of project and comparable or competitive projects
____ Any other agreements or documents that may affect the Property

David Morgan is a commercial real estate consultant and author who specializes in the sale of investment property.