Commercial property due diligence checklist

due diligence checklist

When buying a commercial property it’s very important to make sure you undertake a due diligence checklist. This can initially seem rather daunting – after all, one hears the phrase thrown around here there and everywhere – yet often it’s not entirely clear what it means or how to go about it.

To clarify: “due diligence” refers to the degree of diligence we should exercise to investigate all important issues facing a particular transaction. In other words, the extent to which diligence is “due” under the circumstances – a standard of conduct if you like. It’s important to focus on the right issues and also to understand how to analyse these issues. After all, the last thing you want is to fail to accurately identify the core problems and leave the due diligence investigation incomplete. You also don’t want to go into unnecessary detail, as this makes the process time-consuming and expensive and diminishes the value of the whole process.

When investing in a property you must know the right questions to ask. For example you could ask: “Why is this property being purchased?” And: “What do I need to know to confirm that my objectives can be achieved?” When it comes to commercial property you need to consider market demand; access; use and finance.
Here’s a bit more detail on each of those points:

Market Demand

When checking if there’s market demand it’s important to ask the question as to whether the commercial property is needed or wanted by target consumers in the area where it is situated. This is such an important factor to consider, as if there is no market demand, the project should stop here. If you are looking to use it for your own business needs; market demand must equally be satisfied. If you are speculating, you need to know the demand of your target market.

Access

Once you’re satisfied that there is a market, you need to ask as to whether you can target consumers seeking the goods or services to be offered at the property. Think about where your property is situated and make sure that consumers can access it easily. If you’re targeting a niche, can you accommodate the needs of that niche? This may sound pedantic, but it’s important to consider all factors.

Use

What exactly can you use your property for and can you use it as intended? Is there easy access to utilities/internet etc? You will need to get an independent evaluation as to the environmental condition of the property too – in order to ensure there are no unpredictable problems lurking beneath the surface that could stop the property being used as planned. It’s also important to understand what planning projects are underway in your area and how they’ll affect your building.

Finances

Probably the most important issue; you need to work out if funds can be easily accessed in order to construct the project and whether the investor, be it you or someone else, will receive a satisfactory return on investment to justify the initial outlay and time invested. The best way to approach this is to do a proper cost analysis, understanding the cost of acquisition and the net operating income and capital recovery anticipated.

We hope this due diligence checklist has given you good insight into what to consider when assessing a project for due diligence. Good luck!

Thanks to Paramount Investment, a commercial property investment company in London for this guest blog.

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