What due diligence should I consider before buying commercial property?

Due diligence is the process of investigating a property before you commit to buying it. In commercial real estate, the scope of due diligence is typically broader and more detailed than in residential transactions. The goal is to identify potential issues that could affect the property's value, your intended use, or your long-term ownership experience.

Physical inspection

A commercial property inspection evaluates the building's major systems and components. This typically includes the roof, HVAC systems, electrical systems, plumbing, structural elements, foundation, exterior walls, windows, doors, parking areas, and site drainage. Depending on the property type, specialized inspections may be needed for fire suppression systems, elevators, or other building-specific features. A commercial property inspector is different from a residential home inspector. Look for someone with experience in commercial buildings.

Survey and title

A current survey confirms the property boundaries, shows the location of improvements, identifies easements and encroachments, and verifies access. Title review identifies recorded liens, judgments, restrictions, and other encumbrances that affect the property. In Texas, title insurance is typically issued to the buyer and the lender. Review the commitment and the exceptions carefully with your attorney. Survey and title issues can delay or prevent a transaction if discovered late in the process.

Zoning and land use

Verify that your intended use is permitted under current zoning, deed restrictions, and plat restrictions. Check for required permits, certificates of occupancy, and compliance with local building codes. If you plan to change the use, investigate what approvals are needed and how long they take. Zoning and land use issues are discussed in more detail in our answer on verifying commercial property use.

Lease and financial review

If the property has existing tenants, review every lease, the current rent roll, historical operating statements, tax records, and any service or maintenance contracts. Pay attention to lease terms, rent escalations, expense reimbursement provisions, renewal options, and expiration dates. Verify security deposits and tenant improvement obligations. A tenant's financial strength matters, especially for properties with a single tenant or a small number of tenants.

Environmental assessment

Environmental due diligence typically begins with a Phase I Environmental Site Assessment (ESA), which reviews the property's history and current conditions for potential environmental concerns. If the Phase I identifies recognized environmental conditions (RECs), a Phase II ESA involving sampling and testing may be recommended. Environmental issues can create significant liability and affect financing. Lenders almost always require a Phase I ESA for commercial transactions. See our separate answer on environmental considerations for more detail.

Parking, ADA, and building code compliance

Verify that the property meets current parking requirements for your intended use. Check for compliance with the Americans with Disabilities Act (ADA), including accessible parking, entrances, restrooms, and pathways. Building code compliance affects your ability to obtain or maintain a certificate of occupancy. These issues can be costly to remediate if the property is not currently compliant.

Financing confirmation

Commercial financing is not guaranteed until the lender issues a commitment. Confirm that the property, your financial profile, and the proposed transaction qualify for the loan product you need. Loan terms, interest rates, and closing requirements vary by lender and property type. Getting pre-approved before you make an offer is standard practice.

Scope depends on the property

Not every commercial transaction requires every area of investigation listed here. A newer building in good condition with strong tenants and clear title may need less extensive due diligence than an older building with a complex history and deferred maintenance. Your commercial agent and attorney can help you determine the appropriate scope for your specific transaction.

This article is for educational purposes only and does not constitute professional advice. Consult qualified professionals for guidance specific to your situation.