This document provides an overview of the commercial real estate due diligence process. It explains that commercial contracts typically include an inspection period for buyers to perform investigations of the property. Key due diligence tasks are coordinating professional services, reviewing the title commitment, obtaining a survey, confirming zoning, identifying permits/violations, hiring inspectors and consultants, arranging financing, and reviewing leases. The length of the inspection period must allow time to reasonably complete all desired due diligence before becoming contractually bound to close.

1. PERSONAL INJURY &
WRONGFUL DEATH
LITIGATION
ESTATE PLANNING
REAL ESTATE & TITLE
Commercial Due Diligence
INSURANCE
By: Jack O. Hackett II
MARITAL & FAMILY August 2011
BUSINESS
ELDER LAW
Commercial real estate transactions typically require a different level of due diligence than resi-
ASSET PROTECTION dential deals.
Many commercial contracts give the buyer an inspection period from the time of the contract to
a date certain within which to perform all the investigations the buyer wants. If the buyer decides that
ATTORNEYS the property does not meet his requirements for any reason he can terminate the contract, get his deposit
GUY S. EMERICH back, and go find another piece that suits him better. This is sometimes referred to in the vernacular as
a “free look.”
JACK O. HACKETT II
Because the array of investigations a buyer may want to perform can be wide and varied, someone
CHARLES T. BOYLE
has to order the services and coordinate the team performing them. If the buyer is reasonably sophisticated
DAROL H.M. CARR in commercial real estate, he can be that person. If not, it is usually his attorney. Often, it is a combina-
tion of the two.
DAVID A. HOLMES
GARY A. KAHLE The contract will state who is responsible for obtaining and paying for the title insurance com-
mitment. The title commitment needs to be ordered and produced early on so that a copy of it can be
ROGER H. MILLER III delivered to the surveyor. The surveyor will assist in determining whether all the exceptions on the com-
DOROTHY L. KORSZEN
mitment actually affect the property and will note the easements, boundary agreements, and other recorded
documents on the sketch of the survey.
WILL W. SUNTER
The title exceptions which cannot be removed from the title commitment need to be reviewed in
FORREST J. BASS
light of the buyer’s intended use. These include, where applicable, restrictions on the plat, restrictive cov-
NATALIE C. LASHWAY enants common to the subdivision, condominium documents, master association documents, development
of regional impact documents, and any restrictions found in deeds to the property in the chain of title.
GEORGE T. WILLIAMSON
The legal description of the property needs to be precisely the same in the title commitment as on
the survey and, ultimately, in the deed and mortgage. Any discrepancy between the “official” legal descrip-
tion in the survey and that in the contract needs to be resolved within the inspection period.
The survey sketch will show any encroachments, overlaps, or boundary line disputes and will
identify access to public roads. A properly prepared and certified survey will result in the title insurance
covering any survey problems that might crop up later which are not shown on the survey, but any problem
uncovered by the surveyor will not be insured. The buyer will have to accept it “as is,” attempt to have the
seller cure the problem, or terminate the contract.
The buyer must confirm that the property has appropriate zoning for his anticipated use. Al-
though the zoning classification code is commonly found on the county property appraiser’s website, it is
there for informational purposes only and should not be relied upon. The city or county zoning official
can confirm the zoning classification and uses permitted with or without a special exception as well as any

2. PERSONAL INJURY &
WRONGFUL DEATH
LITIGATION
known or historical zoning code violations. The zoning must be consistent with the comprehensive plan
ESTATE PLANNING
and the future land use map to avoid future use problems, especially on vacant lands.
REAL ESTATE & TITLE
INSURANCE The building official should be contacted to determine if there are any outstanding open permits
or building code violations. This information should be given to the person hired as the building inspector
MARITAL & FAMILY or contractor who will produce a complete building inspection report.
BUSINESS An environmental consultant should be hired to provide a Phase I Environmental Audit. Either
the environmental consultant or the inspector/contractor needs to be determining the presence of asbestos
TAXATION
and Chinese drywall.
ELDER LAW
If new construction is anticipated, a determination of the anticipated impact fees should be made.
ASSET PROTECTION Hopefully, prior to the contract being signed, estimated construction costs, planning and permitting ef-
forts, and timelines have already been developed by a professional engineer or architect working with a
qualified contractor. Sufficient water, sewer, electricity, gas, cable and fiber optic service to meet the
needs of the anticipated use should be confirmed. Draft site plans should be prepared to determine if the
size of building needed can fit on the property along with parking, site improvements, surface water reten-
tion areas, and green space and setback requirements.
Satisfactory financing, evidenced by a formal commitment letter, needs to be arranged within the
inspection period. If the commitment letter has unfulfilled conditions, such as appraisal or obtaining a
participating lender, the contract needs to be modified so that if the deal does not close because of the
failure of one of those conditions the buyer gets his deposit back.
Leases affecting the property need to be reviewed during the inspection period. Although sellers
typically will not obtain tenant estoppel letters until the deposit “goes hard,” the lease review will show
what those tenant estoppels will ultimately state.
Availability of affordable hazard, windstorm and flood insurance should be confirmed, especially
if the property is an older building or close to an open water body.
Although not all commercial real estate transactions will involve every one of the foregoing con-
cerns, some will require even more. An inspection period of sufficient length will need to be incorporated
into the contract so that the coordination and execution of all the due diligence investigations the buyer
wants can reasonably be achieved before he pulls the trigger on being bound to close the deal.
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