Understanding Due Diligence in a Commercial Real Estate Transaction

All types of real estate transactions can be complicated, and buyers and sellers will need to address multiple issues related to the financing, the title to the property, the condition of the premises, and land use laws. Commercial real estate closings can be especially complex, and unlike residential closings, the parties will not be protected by the Real Estate Settlement Procedures Act (RESPA). Because of this, it is crucial for buyers and sellers of commercial real estate to conduct due diligence that will allow them to identify any issues that may need to be addressed before the sale can be finalized.

Types of Due Diligence in Commercial Real Estate Closings

The issues that need to be addressed when performing due diligence can generally be grouped into the following categories:

  • Physical – A physical inspection of the property should be performed to examine its condition, ensure that it is up to code, and determine whether repairs, renovations, or improvements will be needed. This can identify any defects that the buyer may ask the seller to correct while also helping the buyer determine their budget for any work that will need to be done to be able to use the property as planned.

  • Environmental – An environmental site assessment (ESA) should be performed to determine whether the past use of the property has led to any environmental contamination and whether any remediation will be needed. This assessment can also identify any potential issues that would limit the buyer’s use of the property.

  • Financial – A buyer will want to analyze the cash flow from previous uses of the property to determine whether they will be able to earn a sustainable income from the property. Lease audits may be performed to compare currently active leases to the rent collected from tenants, and service contracts may be reviewed to provide an understanding of the options available once the buyer takes possession of the property. Buyers may also perform a cost analysis to determine whether money can be saved on operating expenses, and a market analysis can be conducted to identify opportunities for making improvements and increasing revenue.

  • Legal – An attorney can perform a title search and identify any issues that may affect the transaction, including encumbrances or easements that may affect the use of the property. A property survey may also be performed to ensure that the boundaries of the lot are correct and provide a better understanding of how neighboring properties may affect the buyer’s plans for the property.

  • Operational – A buyer will want to be prepared to execute their business plan once the transaction is complete. This may include hiring a property management team who will ensure that the property is operating correctly.

Contact a South Side of Chicago Commercial Real Estate Attorney

If you are planning to buy or sell commercial property, The Marques Eason Law Group can help you conduct due diligence to ensure that your rights will be protected throughout the transaction and beyond. To get legal help with your closing, contact our Evergreen Park commercial real estate lawyer at 773-973-3755.





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