Often occurring for an average of 60-90 days after the signing of the initial contract, the due diligence phase is a critical time in the process of buying a commercial property.
The Due Diligence Period is the time given to the buyer to fully inspect the property and secure financing. During this period, many of the property’s “warts” will come to the surface, including property defects, title liens, easements, zoning issues and environmental problems to name just a few. Any one of these problems could be a deal-breaker, depending on the amount of money required to address them or how they may impact your ability to use the property. In some cases, the discovery of such flaws could provide leverage to the prospective buyer who could use them to renegotiate the terms of the sale.
The Due Diligence Period is also a time for the buyer to secure financing, and allowing enough time for this process to run its course is critical in protecting your leverage as a buyer. Lenders will often require appraisals and surveys which can often take 30-45 days to be completed, reviewed and accepted. Having them done while still within your Due Diligence Period is very important.
The type of financing made available for the transaction will also affect due diligence, as different lenders and financing options require different things during the process.
If a property is leased by a tenant, their leases should also be reviewed during the Due Diligence Period to ensure you understand the rights and obligations associated with them, how they affect the property, and in what way the terms of lease add to or detract from the value of the property.
The need to do proper research during the Due Diligence Period cannot be stressed enough. Many properties look great at first, but a more careful look might reveal what they are really worth or what might be required to adequately prepare them for their newly intended purpose.
To help ensure a productive Due Diligence Period, consider these tips:
- Restrain your enthusiasm for a property until your due diligence has been completed. Removing emotion during this time will allow you to make clear and rational decisions on how best to move forward, or not.
- Hire the right team. This is not the time to cut corners to save a few dollars. You need people who do this for a living and have many years of experience to fall back on. At a minimum your team should consist of a strong broker, attorney and lender but don’t forget about the value a good insurance agent and accountant can bring. Each should be fluent in commercial real estate and have the experience and resources needed to fully analyze the property and understand how it fits into your needs and budget. A good team is simply good insurance.
- Consider both your short- and long-term property needs. For example, purchasing a building that only provides a solution for your business for the next year or two may not be a wise decision.
- Fully understand the costs associated with managing and maintaining the property. If the day to day expenses for the building are too high, or there are a lot of repairs that need to be addressed, be sure to factor them into your pro-forma to make sure the numbers still work. Don’t fool yourself here, use worst case scenario numbers to test the model.
- Be reasonable, but don’t be afraid to renegotiate the transaction based on what you’ve gathered during the due diligence period. In some cases the seller may be just as surprised as you are to discover a defect on the property and will agree to lower the price or change some terms of the deal.
For more help with understanding and navigating the Due Diligence Period, feel free to contact a New Branch representative. We’re here to help in any way we can.