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Important Due Diligence Documents

Frequently I’m called upon to underwrite a property.  Whether it is for a loan or a purchase for an investment property, some principal or borrower needs to know if their real estate asset will perform as expected.  There is a complex process I go through when underwriting and I cannot cover that in its entirety here.  Though, it typically starts off simple, with personally conducting a BPO if the property is close, a CMA if the property is far, ordering an appraisal and firmly understanding the subject property’s market.  Can you tell I like to immediately determine valuation and sale statistics immediately?

There are other times where I’m called to go deeper and, in addition to the basics above, conduct a discount cash flow (DCF) analysis on the property to determine the value of the property considering all potential future cash flow.  No matter what I do, if the investment is going to go forward, I actively conduct due diligence on the property.

The due diligence of a commercial real estate property can be quite intensive.  It includes multiple reports and items you must collect.  

A few (but not all) important documents and third party reports required are:

  • Property Condition Report
  • Mechanical/Engineering Report
  • ADA Report
  • Environmental Reports (Phase I or higher)1 – Important, see note below
  • List of Deferred Maintenance
  • List of Capital Improvements
  • List of Property Warranties
  • List of all Vendors and their Contracts
  • Parking Lot Layouts, rules and towing company information
  • Preliminary Title Report
  • Inventory Lists
  • List of any current or previous insurance claims or litigation.
  • For Purchases with Leases in Place: Rent Rolls, Leases, Estoppel Letters, Tenant Contact Information, Tenant Delinquency Reports, List of Tenant Improvements.

Keep in mind, due to the length of this article, only a small amount of due diligence items are listed.  There is much more to consider.  For instance, there is a set of actions that must take place before and after the purchase and sale contract is signed.  The type of real estate product (such as retail, industrial or multifamily) also changes what we need to inspect in the due diligence process.  Also, the above list includes almost zero financial due diligence, such as budgets, ledgers or operating statements—it’s mostly information on the property itself.

To conclude, I will expand on uncovered items and topics in later articles and you are always welcome to contact me with questions.  

Here for you in success.

 

1In another article, I explained “why” you want to conduct the Phase 1 Environmental when purchasing real estate.  The quick of it is “strict liability” which is defined as “the legal responsibility for damages, or injury, even if the person found strictly liable was not at fault or negligent”.

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