Buying & due diligence · Checklist
What does commercial real estate due diligence include?
The short answer
Commercial real estate due diligence is the process of investigating a property’s financial, legal, physical, environmental, and operational condition before purchasing it. Buyers review leases, income records, title, inspections, and other documents to identify risks and confirm whether the investment matches the seller’s representations.
Read the full answer ↓What should a commercial real estate due diligence checklist cover?
A thorough review generally addresses five areas:
Commercial real estate due diligence should reflect the property’s age, location, use, financing, and lease structure.
For NNN real estate for sale, buyers must identify which operating expenses, structural repairs, and capital replacements remain the landlord’s responsibility.
Why does environmental due diligence matter?
Environmental due diligence identifies potential contamination concerns and helps buyers evaluate associated financial and legal exposure.
The U.S. Environmental Protection Agency explains that All Appropriate Inquiries (AAI) evaluates environmental conditions and potential contamination liability.
1 year
Qualifying AAI investigations must be conducted or updated within one year before acquisition
180 days
Certain components, including government-record reviews and site inspections, must be updated within 180 days
Source: U.S. EPA, All Appropriate Inquiries.
Under the EPA’s AAI requirements, qualifying investigations must be conducted or updated within one year before property acquisition. Certain components, including government-record reviews and site inspections, must be updated within 180 days.
These requirements concern eligibility for certain federal liability protections, not every commercial property inspection.
A Phase I environmental assessment can identify potential contamination concerns, but it does not guarantee that a property is free of environmental risk.
How should buyers verify lease and income information?
Compare the offering memorandum with executed leases, amendments, rent records, and tenant estoppel certificates where available.
Verify rent commencement dates, escalation schedules, renewal rights, landlord obligations, and any unpaid amounts.
Example
A property priced at $3 million with $180,000 in annual net operating income has a 6% cap rate. If verified income is $150,000, the cap rate falls to 5% at the same price. This hypothetical calculation illustrates the importance of verifying income.
Our guide to evaluating an NNN leased property explains these checks in greater detail.
Key due diligence terms
- Due diligence period
- The contractual timeframe for conducting specified investigations.
- Phase I ESA
- An environmental assessment evaluating potential contamination concerns.
- Title commitment
- A title insurer’s preliminary statement of proposed coverage and exceptions.
- Estoppel certificate
- A signed statement confirming specified facts about a lease.
- Rent roll
- A record of tenants, rental amounts, and lease information.
- Capital expenditure
- A significant cost associated with improving or replacing a property component.
Key takeaways
- Commercial real estate due diligence covers financial, legal, physical, and environmental risks.
- Buyers should verify income against original records.
- Environmental investigations may be essential for liability protection.
- Lease obligations can materially affect property value.
Explore our NNN investment information for additional investment considerations.
The purchase price tells you what you’re paying. Due diligence helps establish what you’re actually buying.
Talk to Our Team
Ready to find your next NNN property?
Reach out and one of our advisors will help you evaluate your options and find the right NNN property.
Triple Net Companies · 1-800-367-7283