Ever heard “Measure Twice, Cut Once”? In Commercial Real Estate Investing, Check diligence twice before writing that big check o

By: Tony Seruga, Yolanda Seruga and Yolanda Bishop

Commercial real estate investment requires diligence and care to indulge into. Certainly, not all sellers intend to cheat but it is highly possible. This presents the need to responsible evaluate the given facts and make an informed decision based on the knowledge at hand. The eventual responsibility falls upon the shoulders of the buyer and he/she should be ready to face the consequences in case of a misjudgment. The diligence time provided is less but nevertheless, it provides the opportunity to assess the decision. Thus, all efforts should be made to efficiently utilize the time at hand.

Commercial real estate refers to the land, buildings and other property that is meant for business purposes. Examples of commercial real estate include malls, office towers, industrial parks, convenience stores, gas stations etc. With the current tide of development and growth, commercial real estate is increasingly become the preferred target for investors. Most people tend to direct their investment in real estate for personal use alone. However, the benefits associated with an investment in commercial real estate are far too many to ignore. For starters, commercial real estate provides better chances of growth, stability and diversification. A well-thought and planned investment in commercial real estate will ensure a relatively steady source of income, growth opportunity, and better tax benefits.

In order to reap the diverse benefits of investment, it might be a better idea to invest in a variety of assets. These assets can include stocks, bonds, personal property, commercial property and others. This diversification in the portfolio will help to get better returns and also reduce the precariousness of investing in one asset without being certain of the benefits that will arise out of it.

Commercial real estate investment presents several facets that need to be considered before a decision is made. Often, all the answers will not be available to you; but having said that it remains undoubtedly important to try to find the answers so that the gathered information can be presented to partners, other investors, lenders and family. Some of the important points that should be considered before an investment is made in commercial real estate are:
• Negotiate with the seller and explain clearly what you are looking for.
• Carefully evaluate the real estate in question and its condition.
• Read carefully the documents related to the real estate; these include the lease with any modifications, mortgages, title policy, certificate of occupancy, insurance policies, ADA compliance, elevator maintenance contracts, tax tickets and history, licenses, parking lot contracts, etc.
• The lease is of primary importance. Be sure to read the fine print and understand all the terms that you are going to agree to; if you are uncertain about some particular terms, ask an expert who can clarify them for you.
• The insurance policy can provide some very valuable information; try to obtain a copy of the last risk assessment and this will help to get a very clear picture of the situation.
• The title policy provides information on easements, rights of way etc. Read through it and figure out if there are any exceptions.
• Evaluate the tenants of the property and figure out the probability that they would continue their lease in the near future.

To better assist you in your commercial real estate investment, go through the following two checklists. These will ensure that no stone has been left unturned and will provide the required confidence you need to sign that big check. In order to ascertain that the information you are acquiring is accurate, consult experts in the fields; these experts can include lawyers, brokers, accountants, engineers, environmentalists etc.

Preliminary Checklist
• Financial records including the Profit & Loss statements and Balance Sheets for the past three years; and the Rent Roll which details the terms, deposit amount and payment history
• Filed tax returns for the last three years
• Insurance policy providing information about risk assessments
• All relevant loan documents
• Deed
• All leases including any addendums
• All other contracts like service or advertising
• Copies of engineering and environmental reports
• Surveys and legal description
• Architectural and Engineering plans and specifications
• Payroll Register (in case of a company)
• Business License
• Inventory of furniture, equipment, supplies, fixtures etc.
• All utility bills
• Bank statements
• Computer system and phone system documents
• Fire system inspection report
• Property tax tickets for the past three years
• Litigation History

Comprehensive Checklist – Pre-closing
• Engineering Inspection
• Environmental Inspection
• Environmental Phases I & II
• LUST Survey – Leaking Underground Storage Tanks
• Audit
• Title Search and policy
• Property tax verification
• Tenant Estoppels Letters
• Mortgage Estoppels Letters
• Legal Verifications – licenses, permits and zoning

A buyer should exhibit due diligence without any hesitation. The ultimate responsibility falls on the buyer and so, he/she should take all steps and give attention to every little detail. In the absence of the decisive due diligence, a buyer can be faced with several issues that may disrupt the plans and the intended use of the real estate. For instance, in case of an industrial park, a buyer may realize much later that the hazardous wastes emitted were being disposed off improperly thereby polluting the environment. This may result in an action by the government limiting or restricting the activities. In another situation, the buyer may have brought the property for a particular project but once the project is initiated, the buyer may discover to his/her shock that the project cannot be undertaken in the area due to certain factors and/or legislation imposed by the government.

In light of all the possible undesirable situations that may arise, it is important to do due diligence before the time is up. This will prevent the buyer from being vulnerable to any alarming situations. Go through all the tiny details before you write that big check and realize to your dismay that your money has perhaps gone the wrong way.

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