Due Diligence in Commercial Real Estate Transactions

Entering into a commercial property investment may seem relatively straightforward but this is a common misconception. It is a completely different ball game to residential property investment and it’s easy to overlook some of the finer details, especially if you are looking to purchase a multi-tenant property such as an office or retail unit. But by applying due diligence to the buying process you will instantly minimise the chances of risk.

The aim of due diligence is to verify and should begin before you sign any legally binding paperwork. Leave no stone unturned – a commercial investment property comes with a multitude of intangibles which need to be taken into account when it comes to evaluating the unit. Therefore you must investigate the property thoroughly and read each and every document available regarding the building and its operation, examining them word for word. This includes any documentation concerning extensions, modifications, mortgages, title policies, certificates of occupancy and maintenance contracts as well as many others.

As an alternate method, investing in commercial property may mean that you are able to convert to real estate investment trust (REIT) status. In other words, you could invest in the property without actually having to buy the bricks and mortar. Operating in the same way as a normal trust, REITs pool investors’ money then invest it into commercial property for them. The main advantage of this method is that rental income and gains from the sale of the asset will be free from tax. However, this is on the condition that most of the fund’s earnings are distributed to its investors in the form of dividends.

However you choose to purchase a commercial property, finding and seeking the advice of a specialist lawyer is an absolute must. Not only can they help you apply due diligence, they can help you to maximise your returns when you purchase your property investment. Commercial units and their success as assets also lie in their location. Things like infrastructure, the economy and amenities such as schools and shops can all have a huge impact on your commercial property investment yields so do your homework.

You should arrange for an environmental assessment of your commercial property investments. UK investors, for example, will usually order a survey of the condition and history of the property before they part with their commercial property investment funds, to ensure harmful materials such as asbestos are not present.

Throughout the process of securing a commercial property investment, advice from a specialist lawyer must always be taken onboard. Failure to do so could cost you a large amount of time and money. Experience is key and with it will come a smoother, better way to work in the future.

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*This page is provided for information purposes only and should not be construed as offering advice. Flex Profit Hub is not licensed to give financial advice and all information provided by Flex Profit Hub regarding real estate should never be treated as specific advice or regulations. This is standard practice with property investment companies as the purchase of property as an investment is not regulated by the UK or other Financial Services Authorities.