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A due diligence checklist for buying commercial property

Categories: Commercial, Investments

There’s no more important stage in commercial property investment than conducting a thorough due diligence. If not for you and your investors, do it for your tenants. After all, they’re your most important investment partner.

Commercial real estate is renowned for its complexity. Beyond the jargon and sophisticated process to own and hold a commercial asset, there are more items to lookout for than the average or first-time investor would ever consider. Which is why it sometimes pays to invest with professionals, in a commercial property syndicate or unlisted property trust

But if you’re considering getting your hands dirty and making it on your own in commercial real estate investment, allow us to shed some light on how we conduct a high qualitydue diligencewith a (by no means complete) commercial property due diligence checklist.

But first, let’s get to the fundamentals.

Why complete a due diligence on commercial property?

commercial property investment in 2021

It’s all about relevance. If you’re looking for a commercial property investment, it’s likely only beneficial to you if you can derive an economic rent from it. It’s important to generate an income beyond the expenses required to keep your property’s heartbeat ticking. To do so, a smart strategy is to appeal to the party who’ll be making or breaking your investment into this commercial asset – your tenant.

In some ways your tenant is your biggest investor and pays ALL the bills – plus your return – so you need to ensure the property is able to satisfy their requirements.

Sure that’s easy to do today. You might see the maintenance and upkeep items that need your attention sooner rather than later.

But you can be smarter than that, and ensure that it will also suit the tenants needs in the future, if and when the lease expiry comes up.

This is where you might ask the question, “What would make any tenant want to occupy your property, as opposed to the one next door?”

For us, answering this question is effectively the entire due diligence in a nutshell, because it ensures the property has market appeal today and tomorrow.

What is a commercial property due diligence?

Due diligence is the investigation of a commercial property’s physical standing and its documentation.

The physical aspect includes looking over such elements as the state of the property itself. Looking at building and structural reports, and putting your own microscope over the bricks and mortar to determine whether any physical defects have wounded the property.

The documented aspect of a due diligence includes even more elements, and this requires the investigator to have a strong left-brain. You would review the property’s identification, like its Certificate of Title, its current zoning and use, and its insurances. We’ve already praised the importance of the tenants in commercial property, so it should be no shock that a good due diligence investigator will pore over the lease agreements, tenancy schedule, and the GST position on each lease.

Both lists – the physical and documented aspects of the due diligence – go on. And on.

Each element – and there are plenty more than those listed above – must be scrutinised. Sometimes it’s the small, precise, and seemingly trivial details that cause the biggest upsets for commercial property investors down the line.

It’s all about caution and care when investing in such a big ticketed item as commercial real estate. Leave no stone unturned.

A (brief) commercial property due diligence checklist

commercial property due diligence

Commercial real estate is usually divided up into three major classes: Industrial property, office property, and retail property. Each asset class has their own perks and quirks, meaning each has their own due diligence checklist.

For an office property, a tenant might want:

  • Great natural light and attractive views for their boardroom;
  • End-of-trip facilities, so their employees can exercise, store their bikes after riding into work, and shower and change before a day at the office;
  • Good car parking (learn more about why car parking matters in commercial property);
  • Close proximity to public transport hubs;
  • Open-plan workspace with disabled access;
  • A solid NABERS rating, proving the property is energy efficient and environmentally friendly.

The checklist for office property is completely distinct to the checklist for purchasing an industrial logistics asset. This is because industrial tenants might want:

  • Drive-through accessibility, so truckers can avoid painstaking three-point turns to get in and out of the premises;
  • Wide public roads and accessibility for large B-Double trucks (allowing for wide turning circles);
  • Substantial hardstand for docking and loading of trucks with a large weight capacity;
  • Proximity to major transport links (highways, freeways, etc.).

And further still, these requirements are completely distinct to retail tenants, who instead might look for:

  • Exposure to a good deal of passing cars;
  • Signage;
  • In-front and convenient car parking;
  • An air conditioned premises (with a high-quality A/C system);
  • A functioning fitout to ensure a perfect customer experience;
  • Polished concrete floors and LED lighting to show-off their goods;
  • Great ceiling height.

For us, it’s all about the land and buildings safety, functionality, and relevance. The ability of the property to meet the needs of the widest bandwidth of potential tenants today… and tomorrow.

For good measure, we also ask the following questions well before going unconditional on the property:

  • Is the land value reasonable?
  • Is the land contaminated?
  • Has the property ever flooded? And what is the danger of natural catastrophes in the future?
  • Are rezoning or usage changes expected in the near future?
  • Are road widening or council-approved plans on the horizon?
  • What is the vacancy rate in the area for similar properties?
  • What are average rental rates in the area for similar properties?
  • How long have similar properties sat vacant in the past year or two?
  • What are the tenancy trends in the area? I.e are they downsizing from 1,000sqm to 850sqm, or are they upsizing to larger floor plate sizes?
  • What is the ideal shape and configuration of premises which relevant tenants are demanding?
  • Is there an ability to put solar on the roof?
  • Is the property encumbered by easements and caveats?
  • Is the property subject to strata? (This might prohibit your ability to make changes to the property as you see fit.)

And to really complete the due diligence checklist, here are a few remaining items we pore over before settlement. We’ve divided them into physical aspects and documented aspects:

Physical aspects of your commercial property due diligence

  • State of the property
  • Structural integrity of the building (i.e. Building and structural report, physical defects)
  • Structural integrity of the machinery (i.e. engineering report, survey, machinery report, air-conditioner report, roof and awnings report, etc.)
  • Plant and machinery permits
  • Required maintenance and structural repairs
  • Valuation report from a qualified and independent valuer (on the banks panel)
  • Land /soil contamination
  • Flood mapping
  • Sewerage and electricity easements
  • Environmental and safety assessments
  • Dates and assessment of any previous fit outs
  • Review and understanding of neighbouring tenants and tenant composition
  • Traffic report and understanding of demographic
  • Discussion with the local council to assess any future development in the vicinity which may adversely or positively affect the prospective property
  • Inspection and viewing of the property for location, convenience, ease of access, traffic flow, etc.

Documented aspects of your commercial property due diligence

  • Certificate of Title
  • Restrictions on sale
  • Restrictions on lease
  • Review and legal advice on all leases
  • Existing lease agreement review
  • GST position in leases
  • Current zoning and use
  • Rates and tax adjustments
  • Current and required insurances
  • Contacting ASIC, PPSR and search registries
  • Aboriginal/Torres Strait Islander heritage listing
  • Burdens and caveats which affect the freedom of access/entry
  • Crown redemption rights
  • Undermining
  • Review and understanding of market rents in the area
  • Tenant history, including arrears schedules, aged debtors, tenant turnover
  • Property history, including vacancy rates, historical repairs & maintenance expenditure, etc.

Your role as a buyer of commercial real estate should be to ensure the property is physically sound and will stand the test of time. It should also be your job to make sure that every detail on every document, including those big words in the fine print, is in order.

Want to invest in commercial real estate?

what's a good commercial property return

Successful commercial real estate investment is no easy feat for a newcomer. But for professionals with years of experience securing big league property investments there’s nothing more exciting than to see a property investment succeed because you knew it would.

If you’re new to investing or don’t have the time to investigate high-quality real estate on your own, perhaps consider investing alongside a professional commercial property investment company like Properties & Pathways. We pride ourselves on thorough due diligence investigations to ensure an ironclad investment for our investors. And why wouldn’t we? We invest alongside each investor in every property.

For more information on our latest unlisted property investment opportunities, get in touch with Properties & Pathways today.

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(A note from the Author: This content is for informational purposes only. You should not construe any such information or other material as investment, financial, or other advice. Nothing contained on our Site constitutes a solicitation, recommendation, endorsement, or offer by Properties & Pathways or any third party service provider to invest in real estate. Every investment comes with risk. You should consult your financial adviser before making any investment decisions.)