Commercial Real Estate Due Diligence Checklist

Due diligence is your opportunity to verify the seller's claims, uncover issues, and renegotiate or walk away if needed. Rushing this process is one of the costliest mistakes in commercial real estate.

The Due Diligence Timeline

Typical Contingency Period

• Smaller Deals (<$5M): 30-45 days
• Mid-Size Deals ($5-20M): 45-60 days
• Large/Complex Deals (>$20M): 60-90 days

Phase Breakdown

• Days 1-7: Order reports, assemble team
• Days 7-21: Property inspections, document review
• Days 21-35: Financial analysis, tenant interviews
• Days 35-45: Final negotiations, contingency removal

1. Financial Due Diligence

Documents to Request

Rent Roll (Detailed)

• Current rent per tenant
• Lease start and expiration dates
• Square footage per tenant
• Security deposits held
• Delinquencies and collections
• Renewal options and terms

Operating Statements (3 Years)

• Income by source (base rent, CAM, % rent, parking, etc.)
• Expenses by category
• Capital expenditures
• Occupancy history
• Bad debt/concessions

Rent Comp Sheet

• Market rents vs. actual rents
• Identify below/above market leases
• Renewal projection impact

Tax Bills (3 Years)

• Confirm actual property taxes
• Check for pending appeals or reassessments
• Verify tax abatements or exemptions

Utility Bills (12 Months)

• Electricity, gas, water, sewer
• Confirm expense pass-throughs to tenants
• Identify usage spikes or anomalies

Financial Analysis Tasks

✅ Reconstruct the Pro Forma

• Build your own income/expense projection
• Compare to seller's offering memorandum
• Question major discrepancies

✅ Normalize Expenses

• Add back deferred maintenance
• Adjust for market-rate management fees
• Include replacement reserves (1-2% of EGI)
• Account for typical vacancy (5-10% depending on asset)

✅ Verify Income

• Call 2-3 tenants (if allowed) to confirm rent and terms
• Check for side agreements or verbal concessions
• Review deposit accounts for delinquent tenants

✅ Calculate Key Metrics

• NOI (normalized)
• Cap rate (actual vs. market)
• Debt service coverage ratio (if financing)
• Cash-on-cash return
• IRR projections (multiple scenarios)

Red Flags

🚩 Operating expenses <30% of EGI (likely understated)
🚩 No vacancy/credit loss (not realistic)
🚩 Below-market rents on expiring leases
🚩 Tenant concentrationrisk (1 tenant >30% of NRA)
🚩 Significant deferred maintenance not in CapEx budget

2. Legal Due Diligence

Documents to Review

Title Commitment & Survey

• Confirm legal description matches property
• Review all exceptions (easements, encroachments, liens)
• Order updated survey showing improvements
• Verify seller can deliver clear title

Leases (Every Single One)

• Base rent and escalations
• CAM/NNN expense pass-throughs
• Renewal options and terms
• Tenant improvement allowances
• Exclusive use clauses
• Co-tenancy requirements
• Assignment/subletting rights
• Termination options
• Landlord obligations

Service Contracts

• Janitorial, landscaping, security
• Elevator/HVAC maintenance
• Property management (if staying)
• Review termination rights and assign ability

Loan Documents (if assuming debt)

• Note and deed of trust/mortgage
• Loan balance and payment schedule
• Interest rate (fixed vs. floating)
• Prepayment penalties
• Lender consent required for assumption

Government Documents

• Certificate of occupancy
• Zoning compliance letter
• Building permits for recent improvements
• ADA compliance reports
• Fire marshal inspection reports

Legal Analysis Tasks

✅ Title Insurance

• Obtain owner's policy (amount = purchase price)
• Review Schedule B exceptions
• Request removal of standard exceptions if possible
• Add endorsements (3.1 zoning, access, etc.)

✅ Zoning Verification

• Current use is permitted
• Desired future uses allowed
• Parking requirements met
• No pending zoning changes

✅ Lease Abstracting

• Create summary spreadsheet of all key terms
• Flag upcoming expirations (next 24 months)
• Note tenant improvement obligations
• Identify problem clauses (co-tenancy, termination, etc.)

✅ Entity Structure

• Form LLC/entity for property ownership
• Review with attorney for liability protection
• Consider Delaware or Wyoming LLC for privacy

Red Flags

🚩 Title exceptions that limit use or value
🚩 Encroachments or boundary disputes
🚩 Non-conforming use (grandfathered zoning)
🚩 Leases with unusual tenant-favorable terms
🚩 Pending litigation involving property

3. Physical Due Diligence

Professional Inspections to Order

Property Condition Assessment (PCA)

• Engineer inspects all building systems
• Estimates deferred maintenance costs
• Projects capital expenditure needs (10-12 years)
• Cost: $3,000-8,000

Environmental Site Assessment (Phase I ESA)

• Reviews site history for contamination
• Identifies recognized environmental conditions (RECs)
• Required by most lenders
• Cost: $2,000-4,000

Phase II ESA (if Phase I identifies issues)

• Soil and groundwater sampling
• Confirms presence and extent of contamination
• Cost: $10,000-50,000+

Roof Inspection

• Condition assessment
• Remaining useful life
• Repair vs. replace cost estimate
• Cost: $500-1,500

HVAC Inspection

• All rooftop units and central systems
• Maintenance history review
• Efficiency and remaining life
• Cost: $1,000-3,000

Structural Engineer (if concerns)

• Foundation settlement issues
• Cracking or structural damage
• Seismic retrofit needs
• Cost: $2,000-5,000

ADA Compliance Review

• Accessibility gaps
• Cost to cure violations
• Cost: $1,500-3,000

Your Own Walk-Through

✅ Exterior

• Parking lot condition (cracking, potholes, striping)
• Landscaping and irrigation
• Exterior lighting
• Signage condition
• Drainage and grading

✅ Roof

• Water ponding
• Membrane condition
• Flashing and penetrations
• Age and type of roofing

✅ Interior Common Areas

• Lobby, hallways, restrooms
• Flooring, paint, cleanliness
• Lighting (convert to LED?)
• HVAC functionality

✅ Building Systems

• Electrical panel capacity and condition
• Plumbing (check for leaks, pressure)
• Fire sprinkler/alarm systems
• Elevator (if applicable)

✅ Tenant Spaces

• Request access to 2-3 units
• Condition relative to rent
• Deferred maintenance evident
• Tenant satisfaction (observe, don't ask directly)

Red Flags

🚩 Significant deferred maintenance (>10% of purchase price)
🚩 Environmental contamination requiring remediation
🚩 Foundation or structural issues
🚩 Roof near end of life (3-5 years)
🚩 Outdated electrical/plumbing systems

4. Market Due Diligence

Research Tasks

✅ Submarket Analysis

• Vacancy rates (property type + submarket)
• Rental rate trends (3-year history)
• New supply pipeline
• Absorption rates
• Key demand drivers

✅ Competition Review

• Identify 5-10 comparable properties
• Visit in person
• Note rents, occupancy, condition
• Marketing strategies

✅ Tenant Market Research

• Who are the typical tenants?
• Business health in the sector
• Expansion or contraction trends
• Creditworthiness

✅ Demographics (Retail/Multifamily)

• Population within 1, 3, 5 miles
• Household income trends
• Age distribution
• Employment sectors

✅ Traffic Counts (Retail)

• ADT (average daily traffic) on fronting streets
• Peak hours and directions
• Visibility and access

Red Flags

🚩 Submarket vacancy >15% and rising
🚩 Significant new supply pipeline (>20% of existing stock)
🚩 Declining population or income
🚩 Major employer exodus
🚩 Retail: traffic counts trending down

5. Tenant Due Diligence

Credit Analysis

✅ Tenant Financial Statements (if available)

• Request 2-3 years financials for large tenants
• Review D&B credit reports
• Public company SEC filings

✅ Tenant Visit

• Schedule meeting or casual stop-by
• Observe business activity
• Employee count and vibe
• Inventory levels (retail)

✅ Verify Business Operations

• Google reviews and reputation
• Better Business Bureau
• Licensing and permits current

✅ Lease Compliance Check

• Using space per permitted use?
• Maintaining space per lease terms?
• Current on rent (confirmed with seller)?

Red Flags

🚩 Tenant failing to maintain space
🚩 Business appears slow/struggling
🚩 Negative reviews or bad reputation
🚩 Financial statements show losses
🚩 Prior landlord disputes or litigation

6. Due Diligence Cost Budget

Small Property (<$1M)

• Property inspection: $1,500
• Phase I ESA: $2,000
• Survey (if needed): $1,500
• Attorney review: $2,000
• Total: ~$7,000

Mid-Size Property ($1-5M)

• PCA: $5,000
• Phase I ESA: $3,000
• Roof inspection: $1,000
• HVAC inspection: $2,000
• Survey: $3,000
• Title insurance: $3,000
• Attorney: $5,000
• Total: ~$22,000

Large Property (>$5M)

• PCA: $8,000
• Phase I ESA: $4,000
• Specialized inspections: $5,000
• Survey/ALTA: $5,000
• Title insurance: $10,000
• Appraisal: $5,000
• Attorney: $10,000
• Accounting/financial advisor: $5,000
• Total: ~$52,000

Budget 0.5-1% of purchase price for due diligence.

7. Due Diligence Contingencies

Standard Contingencies to Include in PSA

1. Inspection Contingency

   • Physical, environmental, and financial review
   • Seller to provide documents within 5 days
   • Buyer has 30-60 days to review

2. Financing Contingency

   • Secure financing on acceptable terms
   • 30-45 days typically

3. Title Contingency

   • Seller must deliver marketable title
   • 10 days to review commitment

4. Lease Approval

   • Review and approve all leases
   • Right to terminate if material adverse lease terms

5. Appraisal Contingency

   • Property must appraise at or above purchase price
   • Required by most lenders

Negotiating Contingency Removal

Option 1: Hard Money Deposit

• Put 5-10% deposit at risk after contingencies removed
• Shows seller you're committed

Option 2: Graduated Deposits

• 1% earnest money (refundable)
• 5% additional at contingency removal (non-refundable)
• 4% at closing (balance of down payment)

Option 3: Free Look Period

• 10-14 days to review basic docs
• Terminate for any reason
• Then transition to standard contingencies

8. Renegotiation Strategies

When Issues Are Discovered

Minor Issues (<5% of price):

• Request seller credit at closing
• Or, seller completes repairs before closing

Moderate Issues (5-15% of price):

• Reduce purchase price
• Escrow funds for repairs (1.5x cost estimate)
• Seller warrants repairs will be completed

Major Issues (>15% of price):

• Significant price reduction
• Consider walking away
• Request extended contingency to get more bids

Sample Renegotiation Email

Subject: Due Diligence Findings - [Property Address]

Dear [Seller/Broker],

We've completed our due diligence on the property and identified several items requiring attention:

1. Roof: PCA indicates $125,000 repair needed within 12 months
2. Tenant Lease: [Tenant Name] has termination option in 6 months, not disclosed
3. Environmental: Phase I identified former UST, recommending Phase II ($15K cost)

We remain interested in proceeding but request one of the following:

• $150,000 reduction in purchase price, OR
• $75,000 credit at closing + seller completes roof repairs pre-closing

Please respond by [date] so we can finalize terms.

9. Final Pre-Closing Checklist

7 Days Before Closing:
✅ Final walk-through scheduled
✅ All contingencies removed in writing
✅ Title company has all documents
✅ Lender has clear to close
✅ Insurance binder obtained
✅ Tenant estoppel certificates signed (if required)
✅ Funds wired to escrow

Day of Closing:
✅ Review settlement statement carefully
✅ Verify proration calculations (rents, taxes, CAM)
✅ Check for last-minute fees or charges
✅ Receive all keys, access codes, vendor contacts
✅ Obtain final executed lease assignments
✅ Transfer utility accounts

Day After Closing:
✅ Record deed (title company usually handles)
✅ Send tenant notification letter (new ownership)
✅ Update property insurance to owner policy
✅ Establish accounting system for income/expenses
✅ Meet with property manager (if using)

The Bottom Line

Thorough due diligence:
✅ Protects your investment from hidden problems
✅ Validates assumptions in your underwriting
✅ Provides leverage for price negotiations
✅ Gives confidence in your purchase decision
✅ Minimizes surprises post-closing

Cut corners at your peril:
⚠️ Skipping inspections to save $5K can cost $100K+ later
⚠️ Accepting seller's numbers without verification is risky
⚠️ Ignoring lease terms can destroy your investment thesis
⚠️ Missing title issues can jeopardize ownership rights

At USLand, we provide sellers' due diligence packages including PCAs, Phase I ESAs, rent rolls, and financial statements to help buyers conduct efficient, thorough due diligence.

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