Buying a commercial building has some great potential benefits, but only if you go about it properly.  While you can be master of your own destiny, you need to ensure that you are not buying a problem property, and while nothing can be guaranteed, you should minimize your risk by ensuring that the building is a sound investment.  To accomplish that you need a really good pre-purchase process that includes comprehensive and practical due diligence.  A practical Due Diligence investigation will ensure awareness and understanding of all material facts relevant to the intended use of the property as well as the potential costs going forward.

Commercial Property Due Diligence will save you some headaches

A property management company that has a great understanding of all areas of a commercial property: the day-to-day operations, leasing needs and requirements, and the financial needs and goals of the buyer in enhancing the value of the asset being bought, would be a great partner in this pre-purchase process.

This is not to replace the use of an engineer for the building condition report nor the review of the leases by your lawyer but a good property manager can a very practical review of these items.

Here is a list of some of the items that should be reviewed:

The Property Itself (the building and the land)

Sometimes a purchaser may have their own engineer provide a building condition assessment and sometimes the vendor will have a building condition assessment completed. Either case a good property manager who deals with commercial property on a day to day basis may have a more current idea of the cost of any deficiencies and expenditure and how to prioritize and schedule such work.

A good property manager would also have a good idea of the marketability of the property.

Both the physical condition of the building as well as the land that it sits on should be assessed to ensure that there are no surprises.  A commercial building inspection will determine if the building is in good shape structure-wise and what the cost-estimate would be, in the event “touch ups” or more extensive repair work is needed.

It typically includes internal areas such as the heating, mechanical, electrical, plumbing, ventilation systems and air conditioning. If one of the systems is not up to standard, an inspection report will clearly state what needs to be replaced or repaired and the total cost. It also includes looking at the building alarms and sprinkler systems in addition to fire safety systems and security systems.

Exterior building areas typically include landscaping, the roof, parking as well as the building foundation and structure.

In addition, you will be provided with information on renovations or how much it would take to make interiors look more current and presentable. Inspections will determine if there are any safety issues that may arise. There are certain local building codes the interior spaces must meet. Interior elements such as the floors, bathrooms, offices, walls and kitchen facilities, among others, are evaluated for safety and living standards, environmental friendliness and cost effectiveness.

Tenants/Rent Roll

Your rent roll is your primary source of income   A fully occupied building with a major tenant can become an under-occupied building if that tenant goes under. So the security of any income stream that depends on tenants must be carefully evaluated too. Payment histories and tenant credit files should be examined to determine how much risk is involved.

The current rent roll is your starting point only since there are numerous areas of risk relating to the health of both current and future rent.

Operating Information

How effectively and efficiently does the building operate, and what will it take to keep everything running smoothly?  Keeping tenants happy on a day to day basis is critical to keeping them as tenants, while running into problems immediately after the purchase is completed is a definite no-no.  So the processes and procedures of managing the operations is crucial from day one onwards, and any potential issues need to be identified before the purchase is completed.

Documentation

Documentation is critical, hearsay is dangerous.  Having everything that is appropriate in a documented format makes the management and running of a property much more reliable, organized and profitable for the buyer because nothing is left to chance or interpretation.  It is important that all your important documentationis filed away so that there are no surprises once the purchase is completed.  If you need a list of the most crucial items just contact me.

Governmental or Legal implications

Knowing what local government or legal implications of the purchase will have on the transaction and the subsequent running of the commercial property will assist the buyer in making a smart investment decision.  For anything legal it is strongly advised that the buyer gets legal advice from a lawyer.

Financial matters/costs

The ultimate health of the property lies in the financial statements (a financial due diligence is critical in order to verify the financials).  Together with the property due diligence, the buyer will be able to assess whether the purchase will achieve his investment goals.  In order to assess both of these items together, make sure you understand the financial impact of the property due diligence portion so that you can factor that into your calculations.

Commercial property due diligence is critical before buying a commercial property

The purchase of a commercial building is a big investment decision for any buyer.  Having a competent property management company with the right level of experience and knowledge in ALL aspects of the property working alongside the buyer, (and in concert with the engineer and the lawyer) will go a long way to reassuring the buyer that the decision being made is the right one.  Don’t just limit your due diligence to the financial aspects only.  If the property has deficiencies, then you should know this ahead of the purchase.

At Armadale Property Management, we deal with the operations, the leasing and the financial/value management aspects of a commercial property.  We know what to look for in a property due diligence prior to purchase and can help you, the buyer, make an educated decision.

If you would like to know more about our Property Due Diligence Services, contact us today.