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Commercial Real Estate Glossary
Last updated on Feb 19, 2023
1 min read

Due Diligence in Commercial Real Estate

Due Diligence refers to the practice of investigating or auditing a prospective investment in order to confirm facts. The audit includes analyzing different aspects of the investment like reviewing financial records, going over all legal documentation, etc. Due diligence is effectively the care any reasonable party should take before entering into any legal agreement or financial transaction

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In this article:
  1. What is Due Diligence?
  2. Questions? Fill out the form below and a commercial real estate specialist will reach out to you. 
  3. Related Questions
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What is Due Diligence?

Due Diligence refers to the practice of investigating or auditing a prospective investment in order to confirm facts. The audit includes analyzing different aspects of the investment like reviewing financial records, going over all legal documentation, etc. Due diligence is effectively the care any reasonable party should take before entering into any legal agreement or financial transaction. The amount of due diligence required depends on the property type and the size of the potential deal. 

Sometimes, due diligence also refers to the audit a seller performs on a potential buyer. In this scenario, the seller is looking for anything that would hinder the buyer's ability to make payments or anything that would negatively effect on the seller after the transaction is completed. It is not unlike the vetting a lender does for borrowers applying for commercial real estate loans.

Questions? Fill out the form below and a commercial real estate specialist will reach out to you. 

Related Questions

What is due diligence in commercial real estate?

Due Diligence in Commercial Real Estate refers to the practice of investigating or auditing a prospective investment in order to confirm facts. The audit includes analyzing different aspects of the investment like reviewing financial records, going over all legal documentation, etc. Due diligence is effectively the care any reasonable party should take before entering into any legal agreement or financial transaction. The amount of due diligence required depends on the property type and the size of the potential deal.

Sometimes, due diligence also refers to the audit a seller performs on a potential buyer. In this scenario, the seller is looking for anything that would hinder the buyer's ability to make payments or anything that would negatively effect on the seller after the transaction is completed. It is not unlike the vetting a lender does for borrowers applying for commercial real estate loans.

For multifamily investing, a basic due diligence checklist includes a market report. A market report, sometimes also referred to as a market study or a market survey, analyzes the subject property’s market and submarket in order to help determine the property’s estimated occupancy level, market value, absorption time, and other data. The study, which is also generally conducted by a third-party real estate consulting firm, will additionally examine market need, local multifamily rents, supply and demand, and other market conditions which could impact the property’s long term profitability. It’s important to note that, for some types of loans, such as HUD multifamily loans, a borrower may need to use an approved third-party consultant.

What are the steps involved in due diligence for commercial real estate?

Due diligence for commercial real estate involves investigating and auditing a prospective investment in order to confirm facts. This includes analyzing different aspects of the investment such as reviewing financial records, going over all legal documentation, and examining market need, local multifamily rents, supply and demand, and other market conditions which could impact the property’s long term profitability. For some types of loans, such as HUD multifamily loans, a borrower may need to use an approved third-party consultant.

The amount of due diligence required depends on the property type and the size of the potential deal.

What documents are typically reviewed during due diligence for commercial real estate?

Typically, documents reviewed during due diligence for commercial real estate include financial records, legal documentation, and other documents related to the investment. This includes the property's income and expense statements, including trailing 12-months (T-12) and the last 3-years profit and loss (P&L) statement. Additionally, a real estate consulting firm may be hired to examine the property’s historical financial statements to reveal any concerns or inconsistencies, as well as making sure that a borrower’s projections are generally accurate.

Sometimes, due diligence also refers to the audit a seller performs on a potential buyer. In this scenario, the seller is looking for anything that would hinder the buyer's ability to make payments or anything that would negatively effect on the seller after the transaction is completed. It is not unlike the vetting a lender does for borrowers applying for commercial real estate loans.

What are the risks associated with not conducting due diligence in commercial real estate?

The risks associated with not conducting due diligence in commercial real estate include not being able to accurately assess the value of the property, not being able to identify any potential legal issues, and not being able to identify any potential tenant issues. Not conducting due diligence can also lead to an investor not being able to accurately assess the potential return on investment, as well as not being able to identify any potential risks associated with the property. Additionally, not conducting due diligence can lead to an investor not being able to identify any potential issues with the syndication sponsor, such as past performance or any potential conflicts of interest.

Source: www.commercialrealestate.loans/commercial-real-estate-glossary/due-diligence and www.commercialrealestate.loans/commercial-real-estate-glossary/syndication

What are the benefits of conducting due diligence in commercial real estate?

The benefits of conducting due diligence in commercial real estate are numerous. First, it helps to ensure that the investment is sound and that all legal and financial documents are in order. It also helps to identify any potential risks associated with the investment, such as occupancy rates, tenant demand, and any potential issues with the sponsor. Additionally, due diligence can help to uncover any hidden costs or liabilities associated with the investment. Finally, it can help to provide peace of mind to the investor, knowing that they have taken the necessary steps to protect their investment.

In this article:
  1. What is Due Diligence?
  2. Questions? Fill out the form below and a commercial real estate specialist will reach out to you. 
  3. Related questions
  4. Get Financing
Categories
  • Commercial Property Loans
  • CRE Loans
  • Commercial Mortgages
Tags
  • Due Diligence
  • Investment
  • Commercial Real Estate Finance

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