The Due Diligence Process for Industrial Commercial Real Estate

When you’re considering purchasing an industrial property, going through the due diligence process can seem like a time consuming headache. After all, who wants to wait a month or more to move in once you’ve found the perfect property?

Well, one of our recent clients found out just how important the due diligence process can be when we found a hidden environmental issue that would have put them millions of dollars in the hole – all for a $250,000 property! On this particular commercial real estate property, everything looked great until we found some leaks from underground tanks.

Thoroughly checking into environmental concerns, evaluating the property’s financial performance, double checking on regulations and zoning requirements, and reviewing the title and survey records are just a few important parts of the due diligence phase.

The scope of due diligence is similar for industrial, office, retail, and other types of commercial real estate purchases. However, for industrial property types, it’s especially important to capitalize on environmental assessments, functionality of operations, utility implications, and zoning regulations.

What is Due Diligence in Industrial Real Estate?

The due diligence process is a series of steps that help you determine whether or not a property will be a good investment. The process of due diligence in industrial real estate takes into account a variety of factors. It assesses potential risks, necessary repairs, and other non-physical and physical aspects of the property to help a buyer make an informed decision.

From a financial analysis to environmental inspections and much more, it’s vital to conduct a thorough investigation of a commercial property to help you determine whether an investment might potentially become a lucrative asset or a money pit.

The due diligence process starts after your offer is accepted, and it typically takes anywhere between 30-75 days. Thoroughly completing each step in the process will help determine whether you, as a buyer, want to move forward with the sale.

Before the process starts, the buyer will put up a deposit referred to as “earnest money”. These funds are typically held by the title company or an attorney during the process. During the due diligence period, the buyer can terminate the contract for any reason and receive the earnest money back. However, if you terminate the contract after the due diligence period is completed, you will not be able to recuperate these funds.

Although the due diligence process might seem like a hassle, it’s a highly important period of time in which you can thoroughly investigate whether a property will be a good fit for you or not.

When you work with our team at Regent CRE, we’ll walk you through all of the details of the process, so you don’t have to worry about the often-complicated components that are involved. As your commercial real estate broker, we’ll ensure that no steps are missed, so you can feel confident in closing the deal on your next industrial property.

What’s Involved in the Due Diligence Process?

As a prospective buyer in a commercial real estate transaction, it’s vital to make sure that all of the important aspects of a property are checked out before you close the deal. So what exactly is involved? The major elements of a due diligence checklist include:

1. Environmental Site Assessment

This is one of the most important parts of the due diligence process when it comes to industrial real estate. An environmental site assessment is generally a two-phase process that checks for environmental issues and liabilities. And more than simply being an invaluable resource for you as a buyer, most lenders also require it.

An environmental site assessment (ESA) checks for contamination issues on the property, such as radon, mercury, lead, oil, and asbestos. If there are toxic chemicals in the soil or water, that’s definitely something you want to know beforehand. If potential environmental risks are detected, you can either walk away from the deal or ask the seller to resolve the issue before you buy the property.

2. Property Inspection

A property inspection looks at the structure and systems on the property. A property condition assessment (PCA) is a common component of the due diligence process. During this assessment, a professional comes through and looks at structural components and safety hazards, plumbing, HVAC, and electrical systems, and any other applicable areas of the property.

A property inspection can also evaluate other components, such as parking lots and landscaping, and identify any needed repairs and costs.

3. Zoning Compliance Check

For industrial commercial properties, a proper understanding of zoning regulations is highly important. Industrial properties generally fall into either light industrial or heavy industrial zoning categories, and getting a property rezoned is a long, complicated process that doesn’t always end in success.

Making sure that the intended use of the property aligns with the current zoning laws and regulations is a crucial aspect of due diligence.

4. Financial Analysis

In addition to assessing the status of the physical aspects of the property, a financial analysis is an important step in a thorough due diligence process. It looks at the property’s financial performance by reviewing past financial statements, checking into reported earnings, and looking at factors such as operating costs, rental rates, and vacancy rates.

A financial analysis helps a prospective purchaser to feel confident about the value of the property and whether or not it’s a sound investment for the purchase price.

5. Tax Assessment

Evaluating tax documents gives potential buyers valuable information regarding a commercial real estate investment. This can include property tax records, payroll tax records, and any other tax forms and returns from the last several years.

This type of assessment gives buyers a forewarning regarding any potential issues or liabilities with the property’s tax status.

6. Market Analysis

A market analysis looks at trends in the local market as they relate to the property type and the specific piece of commercial real estate. This type of analysis can give a buyer helpful insight regarding the property’s value, market trends, demand dynamics, and more.

A thorough market analysis gives a potential buyer the understanding to make sound investment decisions and consider how market trends will influence the property’s future value.

7. Title Review

A title and survey review examines any possible liens or restrictions on the property. This part of the process can be an important step which ensures that the buyer won’t run into any legal issues having to do with ownership of the property.

Conducting due diligence is a personalized process that differs somewhat for every commercial property investment. While this list outlines some of the main steps involved in due diligence inspections, assessing a property’s condition, tax status, and market value are just a few of the most vital steps in the intricate process.

Who Should Be Involved in the Due Diligence Process?

The best way to make sure that nothing is missed in the due diligence process is to work with a commercial real estate broker. An experienced broker has been through this process many times, and understands the necessary steps that should be taken to assess every important aspect of a property. A broker can also give you valuable insight into the local market with your investment objectives in mind.

Other members of a due diligence team might include a property inspector, contractor, site consultant, financial advisor, and commercial real estate attorney.

Is Due Diligence Really a Big Deal for Industrial Properties?

Absolutely. In commercial real estate transactions, the due diligence process is a step that you don’t want to miss. In industrial zones, manufacturing facilities, and factory properties, it’s especially important to thoroughly investigate environmental conditions, all structural components and systems involved, and zoning restrictions.

When it comes to industrial properties, it’s unfortunately not too uncommon to find issues with pollution, chemical spills, or oil leaks (such as in the case of the client we mentioned above). Soil and water tests can help ensure that your investment won’t become a liability down the road.

And in addition to assessing the physical condition of the property, a financial and market analysis gives potential buyers confidence when it comes time to sign the sale agreement.