The Key Documents of Due Diligence
A final decision to invest in a commercial property is usually dependent on the results of a due diligence analysis. When doctors invest they rely on their team and use a systematic process of investigation into the details of a potential investment, such as an examination of operations and management, a review of all financial records plus other elements material to the sale, and the verification of presenting information.
Applying a consistent standard of inspection and investigation regarding Market, Financial, Tenant, and Physical Property, one can determine if the actual conditions do or do not reflect the “facts” as represented. In the examination certain key documents are required to reduce the risk of investors capital.
Here is a list of documents you will review:
Market
- Current & historical market vacancy rates
- Current market CAP rates
- Sales comparables that include price-per-square-foot, and/or price- per-unit for apartment buildings
- Rent comparables
- Population and job growth
- Construction permits (from broker or third party online)
- Local market demographics
Financial
- Year-to-Date detailed Profit & Loss (P&L) statement
- Historical financial statements for the previous three years
- Current operating and capital budgets
- Statements of Capital expenditures for past three years
- Copies of service, maintenance, equipment leases and other contracts
- Copies of tax assessments and real estate tax bills for past three years
- Accounts payable & Receivables
- Copies of current insurance policies
- Reports of any insurance claims during the past five years
- Current rent rolls to validate income on financial statements
- Tenant delinquency reports
- Report of historical occupancy and two years’ rent rolls
- Pending or threatened litigation
Tenant
- Rent rolls that document each tenant, tenant’s name, suite number, size of occupied premises, base rent, rent increases, pro rata share of common area operating expenses, caps, security deposits, balance owed, term, commencement and expiration dates and options
- Current property management reports, including unit status reports, occupancy reports, expired leases, pre-leases, move-outs, eviction notices
- All leases, including all exhibits, addenda, guarantees, amendments, supplements, attachments, modifications and subleases
- A standard lease form
- Concessions made to tenants, including free or reduced rent, tenant improvements, cash payments and move-in allowances
- Credit or background checks.
- Estoppel certificates, especially for office, industrial or retail properties.
Physical Property
- All historical appraisals and photos
- All architectural, construction, and other drawing including, but not limited to: site plans, elevations, schematics and renderings
- Any and all environmental impact reports, including Hazardous Waste and/or Toxic Waste studies
- All surveys and recorded parcel/tract maps, including special studies zones, if any
- Evidence of all government approvals including, but not limited to, all Certificates of Occupancy
- Title report
- Copies of any notices or violations of city, county, state, federal or other codes, laws, rules, regulations or ordinances, including health, fire, building, zoning, safety or environmental
- Current list of any known maintenance issues
Sellers may also perform a due diligence analysis on the buyer. Items that may be considered are the buyer’s ability to purchase, as well as other items that would affect the purchased entity or the seller after the sale has been completed. The buyer or investor has a fiduciary responsibility to analyze these Key Documents before signing a legal contract or committing to investing in real estate.
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