Commercial real estate due diligence is the investigation a buyer completes after signing a purchase contract and before closing, to confirm the property is what the seller says it is. A complete checklist covers the financials (rent roll, leases, operating statements), the physical condition (inspections, roof, HVAC, parking), the environment (Phase I environmental site assessment), the legal status (title, survey, zoning) and the tenants (estoppel certificates). Most contracts give the buyer a fixed due diligence period and the right to walk away if problems turn up.
How the due diligence period works
The purchase contract or letter of intent sets the length of the due diligence (or feasibility) period, the documents the seller must deliver, and the buyer's right to terminate. Negotiate enough time for inspections, a Phase I report, lender requirements and tenant review. Read how to negotiate a commercial property purchase and how a letter of intent works.
1. Financial due diligence
- Rent roll. Every tenant, suite, size, rent, lease dates and deposits. See how to analyze a rent roll.
- Leases and amendments. Read every lease, not a summary. Check options, exclusives, termination rights and expense provisions.
- Operating statements. At least two to three years of income and expenses, plus the current year to date.
- CAM reconciliations. Confirm the landlord is recovering the expenses the leases allow.
- Tax bills and insurance. Confirm current costs and whether a sale could trigger a reassessment.
- Service contracts. Which contracts transfer to you and which can be cancelled.
Rebuild the net operating income yourself. See how to calculate NOI.
2. Physical due diligence
- A property condition assessment by a qualified inspector or engineer.
- Roof, HVAC, electrical, plumbing, fire and life safety systems, and their ages.
- Parking lot, paving, drainage and stormwater.
- Accessibility.
- For industrial buildings: clear height, loading, floor condition and power. See what to know before buying an industrial warehouse.
3. Environmental due diligence
A Phase I environmental site assessment reviews the property's history and current use for signs of contamination. Lenders commonly require one. If it finds a concern, a Phase II with sampling may follow. Former gas stations, dry cleaners, auto repair shops and industrial uses deserve extra attention.
4. Legal and title due diligence
- Title commitment. Liens, easements, restrictions and encumbrances.
- Survey. Boundaries, encroachments, easements and parking count.
- Zoning. Confirm the current use is allowed and any planned use will be. A zoning report or letter from the local zoning office can help.
- Permits and certificates of occupancy. Open violations or unpermitted work.
- Litigation. Any lawsuits involving the property or tenants.
5. Tenant due diligence
- Estoppel certificates. Each tenant confirms its lease terms, rent, deposit and that there are no defaults.
- SNDAs. Subordination, non-disturbance and attornment agreements your lender may require.
- Tenant credit and sales. Payment history and, for retail, sales where available.
- Lease expirations. When leases end and the risk of vacancy. See evaluating long-term leases.
Due diligence checklist summary
| Area | Key documents and reports |
|---|---|
| Financial | Rent roll, leases, operating statements, CAM reconciliations, tax and insurance bills |
| Physical | Property condition assessment, system ages, roof and paving reports |
| Environmental | Phase I ESA, and Phase II if needed |
| Legal | Title commitment, survey, zoning confirmation, permits and certificates of occupancy |
| Tenants | Estoppels, SNDAs, payment history, lease expirations |
How Fred's Properties helps buyers
We help buyers in Northern Virginia negotiate due diligence terms, collect documents from the seller, review rent rolls and leases, and coordinate with your attorney, lender, inspector and environmental consultant. Read how to evaluate a commercial real estate investment and browse properties for sale.
This article is general information, not legal advice. Work with a real estate attorney on your purchase.
Next step
Buying a commercial property? Call Fred at 703-505-3501 or send us a message.
Frequently asked questions
How long is a due diligence period in commercial real estate?
It is negotiated in each deal and depends on the property's complexity, the number of tenants and lender requirements.
What is a Phase I environmental site assessment?
A report that reviews a property's history and current conditions for signs of environmental contamination. Lenders commonly require one.
What is a tenant estoppel certificate?
A signed statement from a tenant confirming its lease terms, rent, deposit and that there are no defaults. It protects the buyer from surprises.
Can I back out of a commercial purchase during due diligence?
Usually yes, if the contract gives you that right during the due diligence period. Read the contract carefully, since deposits can become non-refundable after the period ends.
Who pays for due diligence reports?
Usually the buyer pays for inspections, the Phase I and the survey, while the seller provides documents. Each contract can differ.
