Buyer and Seller Beware: CRE Requires Careful Due Diligence

Verify, verify, verify.  That is what due diligence is really all about.

Maybe you’re a buyer interested in a property—either to start or expand your business.  But where are the hidden issues?  Is there a lien placed by unpaid contractors? Is the property zoned appropriately for your intended business?

Or perhaps you’re a seller, interested in moving an eager tenant into one of your developed properties.  But there may be unknown concerns like a restrictive covenant.  Or a lack of available liquor license that would prohibit your buyer from being the latest local bar and grill.

Involve a team of professionals
So before jumping into any commercial real estate deal, it is critical for you and a team of professionals to complete thorough due diligence.  While there are obvious fees for the team to divide and conquer, the costs can save you from making an unsound investment decision—and can dramatically increase the value of your investment if done right.

An experienced title agency in addition to their role in performing due diligence can coordinate these professionals.  The title agency can arrange for engineers to assess environmental and infrastructure issues.  They can also connect with commercial real estate attorneys who handle zoning and other legal matters.

Due diligence: steps to follow
With your assembled team, following these guidelines will deliver a sound commercial real estate deal and ensure your peace of mind.  Without it, you’re making a hasty and likely unwise gamble.

Evaluate the property for your purpose
What is the exact property you think you’re purchasing/selling? All of this should be spelled out up front.  Is it land, a building, fixtures, future development rights? Is it suited for the identified business strategy? Are there legal restrictions (restrictive covenants) that will keep the buyer from launching their business plan?  For example with a grocery store as the anchor in the intended development, this may preclude a bakery, pharmacy, or other business which has similar services from launching their business in that location.

Understand the infrastructure and soundness of the property
Are the physical conditions (parking, improvements, access) suitable for the planned use?  Are there sufficient or existing sewer and water lines and other utilities that would be costly to address?  Are there any existing environmental issues (lead paint, asbestos, wetlands, underground tanks) that need to be resolved prior to the sale? Are the roof, HVAC, building envelope, and other structures sound?

Complete title work early on

Are there any easement issues, liens on the property or other title issues that need to be addressed? Thorough title examinations will include sixty-year searches and current owner searches. It is critical to obtain a free and clear title before diving too far into the deal.

Know your buyer or seller

While it seems that this would go without saying, make sure the seller owns and has the right to sell the property.  Equally important is ensuring that the buyers have proper financing with clear terms and have a good lease/purchase history.  There’s nothing like a quick bankruptcy from a major anchor to leave a multiple-property investment in crisis.

Timeline for due diligence
Every document related to the property— tax history, licenses, leases, modifications, insurance policies, and many more—must be examined by your title agency before the deal is complete.  It is common for due diligence to last at least 60 days, but for complex commercial real estate deals, it can take up to a year.

The most important factor to remember: haste in commercial real estate really does mean waste.  Thorough due diligence with a title agency and team of professionals can mean the difference between a flourishing business and a lousy deal.

Patrick Hughes is an officer of Excel Title Services and a partner with Dressman Benzinger LaVelle in greater Cincinnati.  Excel Title is a Cincinnati title agency that offers a full range of title insurance products and coordinates title services for clients and commercial projects nationwide.