The Complete Due Diligence Checklist for Buying Commercial Property: 10 Steps to Take

What is due diligence?

Due diligence is the process of researching a potential investment in order to reduce the risk of financial losses. Due diligence for buying a commercial property typically involves investigating the property’s condition, location, and zoning regulations. It may also involve running a background check on the sellers and checking for liens or other encumbrances on the property. By taking the time to do their due diligence, investors can minimize the risks associated with commercial real estate purchases.

Due Diligence Checklist when buying a commercial property

1. Location 

Is the property located in a desirable area? Consider things like foot traffic, public transport and parking. 

Location is often one of the most important factors to consider when searching for a new home or business. It can impact everything from commute times to the type of amenities that are available. That's why it's so important to include it in your due diligence process when considering a new location. Here are just a few of the things you should keep in mind:

• Zoning regulations: Make sure you're aware of any zoning regulations that could impact your use of the property.
• Crime rates: If you're looking for a safe neighborhood, be sure to check out the crime rates for the area.
• Proximity to amenities: How close is the property to schools, shopping, and other amenities?

2. Zoning

Is the property zoned for commercial use? Check with your local council to confirm.

Zoning is an important consideration in any real estate transaction. It regulates the use of land for commercial, industrial, or residential purposes. Zoning ordinances can vary greatly from one municipality to another, so it is important to be familiar with the zoning regulations in the area where the property is located. 

Zoning can have a significant impact on the value of a property, as well as on its future development potential. For these reasons, it is essential to include zoning in any due diligence checklist. A knowledgeable town plannercan help to identify any potential zoning issues that may affect the property.

3. Building condition 

Get a building inspection to assess the condition of the property and identify any potential repairs or renovations that may need to be carried out.

When considering any property purchase, it is essential to carefully inspect the condition of the building. This due diligence will help to ensure that you are fully aware of the potential costs involved in bringing the property up to an appropriate standard. 

It will also give you a better understanding of the property's value and its potential resale value. In some cases, the cost of repairs can be so high that it makes more financial sense to walk away from the deal. 

However, even if the repairs are not prohibitively expensive, they can still eat into your profits if you're not careful. As such, it is always advisable to consult with a qualified building inspector before making any final decisions.

4. Title 

Check the title to ensure there are no encumbrances on the property and that it is registered in the correct name.

One of the most important items on the checklist is title. The title is a document that proves ownership of the property. 

It includes information such as the names of the current and previous owners, any liens or encumbrances on the property, and any easements or rights of way. 

This information is essential in understanding the property's value and potential risks. Without a thorough title search, you could find yourself locked into a bad investment. 

5. Leases 

If there are any existing tenants, check their leases to see how much time is left on their terms and what the terms are.

When considering the purchase, it is essential to review all of the leases associated with the property. The terms of the leases can have a significant impact on the value of the property and your ability to generate income from it. 

For example, if the current tenants have favorable lease terms, they may be able to stay in place for many years to come. On the other hand, if the leases are due to expire soon, you may need to invest considerable time and money in finding new tenants. In addition, the terms of the leases can also affect your ability to make improvements or changes to the property. As a result, conducting a thorough review of all leases is an essential part of the due diligence process when considering the purchase of a commercial property.

6. Strata 

If the property is part of a body corporate scheme, check the body corporate by-laws to see if there are any restrictions on commercial use or any special levies that may be payable. You also want ascertain the amount held in the sinking fund and any proposed expenditure the body corporate intends to make.

In addition to evaluating the condition of the property and its potential for generating income, it is also important to consider the restrictions that may be placed on the property by body corporate by-laws. 

These by-laws can impose significant limitations on what can be done with the property, and they can also be costly to change. As a result, it is essential to review the body corporate by-laws before signing any contract. 

7. Outgoings 

Check what outgoings are payable on the property, such as council rates, water charges and body corporate levies.

One important element of due diligence is to carefully assess all outgoings associated with the property. This includes things like rates, insurance and maintenance costs.

Failure to properly account for outgoings can have a major impact on the profitability of a property and should therefore be given careful consideration.

8. Insurance 

Make sure the property is adequately insured for both buildings, public liability and contents cover.

There are a number of potential risks that must be covered by insurance, including fire, flood, theft, and vandalism. In addition, the property owner will be responsible for any injuries that occur on the premises. 

As a result, it is essential to make sure that the property is adequately insured before completing the purchase. In most cases, the lender will require that the borrower obtain a policy with coverage limits that are equal to or greater than the value of the loan. By ensuring that the property is properly insured, both the buyer and the lender can protect their investment in the event of any unforeseen damages.

9. Tax 

Check with your accountant to see what tax implications there may be in owning the property.

Any potential commercial property investment should include a careful review of the tax situation. This is because taxes can have a significant impact on the bottom line, and they can also vary widely from one location to another. 

As a result, it is important to know what the tax burden will be before making a purchase. Furthermore, taxes can also change over time, so it is important to stay up-to-date on the latest rates. 

In order to make informed decisions, buyers should work with a qualified tax professional who can help to understand the implications of any potential purchase.

10. Financing 

Arrange suitable financing ahead of time so you know how much you can borrow and what the repayments will be.

Funding is a vital part of any commercial property due diligence checklist. The process of assessing a potential property investment can be very costly, and without adequate funding in place, it simply isn't possible to move forward. 

There are a number of different ways to finance a commercial property investment, but the most important thing is to make sure that the numbers add up. Once you've found a property that meets your investment criteria, it's essential to work with a professional team to assess the risk and return profile. 



Only then can you make an informed decision about how to proceed. Without proper financing in place, it's simply not possible to conduct a thorough due diligence assessment - and that could be costly down the line.

Documents

There are two elements you need to look into before you commit to a commercial real estate purchase, the property and the owner.

For property verification, the following are the basic documents that you need:

• Title search
• Plan
• Any encumbrances that show up on the title, such as easements;
• Department of Transport & Main Roads searches;
• Contaminated Land;
• Rates and water;
• Drainage and sewerage plans;
• Development/building approval searches;
• Soil testing;
• Land tax search;
• Council Building notices search;
• Town planning searches;
• Surveyor searches.

These are the basic documents that you need to verify the owner you are making the purchase from:

• Litigation searches;
• Company search and PPSR search on the owners of the property;
• Bankruptcy & PPSR searches if the owners are individuals;
• Trust deed if the property is owned by a trust
• All relevant financial information such as tax returns, BAS, and financial statements (you should seek advice from your accountant as to what financial information would be relevant for the type of commercial property transactions);
• Copy of any leases if the property is leased;
• Copy of community management statement and comprehensive body corporate record search, if the property is within a body corporate;
• Copies of any management/supplier agreements in relation to the commercial property
• Obtain advice from surveyors, town planners, engineers and builders depending on any developments they wish to carry out on the property;

A consultation call with us will clear any doubts you have about documentation. This article does not constitute legal advice.

Physical Site Visit

When considering the purchase of commercial property in Australia, there are a number of factors that should be taken into account during a site visit. First, it is important to assess the condition of the property and identify any potential repair or maintenance issues that may need to be addressed. 

Second, it is important to consider the location of the property and whether it is situated in an area that is likely to experience future growth. Third, it is important to review the zoning regulations that apply to the property and ensure that they are compatible with your desired use for the property. 



It is important to obtain a comprehensive report from a professional Quantity Surveyor which outlines all of the estimated costs associated with the purchase and ownership of the property. Finally, seek appropriate legal advice about anything that confuses you.

Conclusion

Commercial property is a big investment, and it's important to do your homework before purchasing. By doing your research ahead of time, you can avoid making a costly mistake with your commercial real estate purchase. 

There are many factors you need to take into account, from zoning laws to infrastructure needs. Contact KMB legal if you're looking for help understanding all of the legal implications of buying commercial property. We have years of experience in this field and can guide you through every step of the process. Book a free consultation with a commercial lawyer now.

FAQs

How do you prepare for due diligence?

Before starting due diligence, it is important to understand the process and what is needed from you as the business owner. The first step is to compile a list of all the documents that will be requested by the potential buyer. This includes things like financial statements, tax returns, contracts, leases, and insurance policies. 

What is an Example of Due Diligence?

When buying property, legal due diligence typically includes things like touring the property, reviewing its financial history, and checking for current zoning changes that could affect its value.  Looking into current lease arrangements, car parking arrangements if you plan of starting an establishment that will see a lot of foot traffic may  also be important.

What is Standard Due Diligence?

Commercial property buyers usually hire experts to assist with due diligence prior to purchase. These might include environmental consultants to assess the potential for contamination, engineers to evaluate the condition of the buildings and conduct a visual inspection. 

Property lawyers can review documents, identify any potential risks and conduct court registry searches. The buyer's team will also conduct a market analysis to determine whether the asking price is reasonable, and they may negotiate with the seller to try to reach a more favourable deal. 

In some cases, the buyer may also choose to have a financial appraisal performed in order to get an independent assessment of the property's value.