Top 5 Due Diligence Tips
March 2 2022
Before signing on the dotted line and grabbing the keys to your new commercial real estate investment, it pays to know exactly what you’re buying.
Thorough due diligence is the best way to assess the value of the property, any risks associated with buying it, and the ongoing potential to know if it’s the right deal for you.
In today’s video, Kollosche Commercial agent Adam Grbcic shares the first 5 steps to take before signing a contract or before a contract goes unconditional.
1. Review the Lease
Reviewing the current lease is the first and most important step of your due diligence process.
There are three types of leases in Commercial property: A Commercial Tenancy Agreement (this is a short-term lease, generally used in industrial and commercial properties for leases less than three years); Commercial Leases; and Retail Leases.
The first step in your due diligence is to make sure that the tenant, or proposed tenant, is on the correct lease for the business in which they trade. You also want to make sure that the lease is assigned correctly. All too often we see leases that are not signed in the right section, not witnessed correctly, or signed by the wrong person.
Also be sure to review the ‘Make Good Clause’ and what sort of default interest comes into play if your tenant stops paying rent.
2. Security and The Tenant
There is a list of questions to ask in relation to the Tenant: Who is the tenant? How long have they been trading for? How long have they been trading in that location? What industry are they in? What macro factors are affecting their industry at this time?
With regards to security, have a look into what sort of bond or bank guarantee is in place. This information is important not only if the tenant stops paying rent, but to know if the amount covers the cost of cleaning and removing their items if the tenant does stop trading.
3. Zoning and Permissible Use
As part of your preliminary due diligence, we recommend that you check that the tenant’s use of the property is permissible under the Town Plan and whether they have the appropriate approvals in place. Council can, at any time, issue a ‘Show Cause’ notice to the tenant who may have to stop trading as a result. This could impact their ability to pay rent and to continue trading at the property, as well as causing you major issues down the line.
4. Rental Payment History
Request a history of the rental payments made by the existing tenant. When reviewing those payments, consider: Have payments been made regularly? Has the rent been paid on time? Does the current rent match the lease document? Have the correct increases been applied to the tenant over the term of the lease?
5. Request All Property Records
Ask to sight a copy of any building reports, building plans and maintenance records for the subject property. You’ll want to assess whether the property is in good order. But most importantly, you want to look at which items are going to cause or cost the highest capital expense if something goes wrong.
One major item to look at is the air-conditioning: Has it been serviced regularly and correctly? What lifespan does it have from the time you purchase? You can then take that information into account when you budget your ongoing costs for that property.
Kollosche Commercial encourages you to engage either a solicitor, accountant or business advisor to conduct thorough due diligence, especially if you have any uncertainty.