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today i'm going to walk you step by step through commercial real estate due diligence and be sure to hang around until the end where i'll give you a link to download my due diligence checklist as seasoned commercial real estate investors like to say you make your money when you buy it so if that's true then conducting your due diligence before you buy the site is crucial to your success as an investor but what if you've never gone through the process before well let's dive on in first organize your files once the contract is fully executed and finalized we organize it into a project folder on google drive and send a fully executed copy to our real estate attorney and any partners involved in the project the sellers will have a number of files that we require they turn over within a specified number of business days after the execution of the contract typically in the 5 to 10 business days range these files can include property surveys leases appraisals governmental notices photographs easements and so much more which i'll be sure to cover on the checklist as you can tell having these files readily accessible through the cloud is very convenient when working with multiple team members and partners since everyone can add to and view the folder at any time necessary be sure to thoroughly investigate each of these files to ensure that you fully understand what is involved with the property you're buying second explore financing options if you haven't discussed the project with your lenders prior to going under contract open up the conversation with them immediately the more time you have to work with your lender on the project and get them comfortable especially if it's a unique project or a heavy left the better off you'll be when it comes to closing winners typically require the following from each of the partners two to three years of tax returns and k1s if any a personal financial statement a copy of your driver's licenses your track record and the information for the entity with which you'll be buying the property i also like to send my lenders a crs tax report on the project an overview of my plans for the site an abbreviated version of my underwriting and an abbreviated version of my offering memorandum now if you're raising capital for the project it's unlikely that you're going to have your offering memorandum compiled the same day that you put the property under contract i typically open up the conversation with potential lenders to test the waters and see if this project is in line with what they're interested in at this stage if so i get high level terms that help me finalize my underwriting before i come back to them with my full request on the project third review the operations begin reviewing any and all contracts and documents related to the property after receiving them from the owners including but not limited to leases operating expense statements utility bills rent rolls etc if you're buying a property based on the income that it produces like on a cap rate then you'll want to double check to make sure that the property is actually making the money is advertised at this point in the due diligence period i'll loop in my property management firm to help dive into the leases rent roll and operating expenses they'll also visit the site with me so that we can start putting together a list of capital expenditure items that may need to be addressed in the next few years now if possible get your cpa or financial officer involved in the numbers too fortunately it's fairly easy to follow the numbers if you have a qualified professional on your side so that you know how truly profitable or unprofitable a project is when you're able you'll want to open up the discussions with the current tenants to see what they like and what they don't like about the property what their wish list might be and if they're interested in renewing their leases of course you'll likely need to do this talking through the current owner or their property manager considering how sensitive sales can be sometimes with tenants your primary objective here should be to investigate how you could possibly run the property more efficiently we're able to significantly increase our property values oftentimes without raising rents simply by decreasing our operating expenses and therefore increasing our net on income now would be a good time to see if you can get a better deal on landscaping property management or save on utility costs by installing led lighting and so much more now fourth you'll want to actually get out and inspect the property you may even get to this before diving into the documents but you'll want to inspect the property and i don't mean just a casual walkthrough i mean the kind of inspection where you spend half the day on site if the project is big enough you need to be thorough in your inspection and get eyes on every possible nook and cranny to make sure you know what potential issues there may be on site you'll also want your team with you which could include property management general contractor leasing brokers architect property inspector and anyone else you may deem necessary now that i've worked on a number of projects from the brokerage management and ownership sides i have a pretty good understanding of exactly what i need to look for when i'm on a site visit however i will still engage a property inspector if i find anything suspicious so that i have backup to my claim should i need to renegotiate with seller when you're on site try to ask the business owners and employees or any customers what they like and don't like about the property you'll be surprised at what they'll share with you and it'll certainly help with not only your understanding of the property but also your tenant relations if you actually fix the issues they point out fifth bring in the site consultants unless you have a number of degrees on the wall it won't be possible for you to conduct all of your due diligence on your own so that's where your site consultants come out i'll typically engage this team once i've gotten through my initial inspections to make sure that i'm as smart with my money as possible after all if you can't get past an issue in the rent roll there's just no point in hiring a team to core drill a site right first phase one environmental or esa the phase one environmental report often referred to as an esa assesses the current and historical uses of the property to determine whether there may or may not be contaminated soils and waters asbestos and lead-based paint each of these would of course need to be remediated prior to tenancy since they pose a major health risk next is your survey or alta survey surveys are performed to demonstrate precisely where your property abuts to your neighbor's properties which can be important if you have parking lots fences and even buildings that are encroaching on the wrong property you can take these a step further by performing an alta survey which may be required by your lender and that relates the boundaries to the property's title then you have geotechnical geotechnical engineers run reports on your site by drilling boreholes throughout the property providing you with information about the type of soils present soil compaction strength and density the presence and potential location of rock and solutions for any potential site issues the last thing you'd want to do when buying commercial property is to undercut your development budget because you didn't anticipate having all that rock on site then you have your traffic engineers traffic engineers conduct studies about the flow of traffic to and from the property and in surrounding neighborhoods to determine the potential impact of your project the study will reveal any potential bottlenecks and infrastructural issues that may arise and can determine whether or not you need to add traffic lights four-way stops speed bumps and more up next you'll want to engage your architect and engineer at this point in the due diligence timeline you're ready to start putting together your official plans for the property if you're just looking to renovate the site you'll only need to get your architect to work with you on the renovation plans and selections however if you're developing from the ground up you'll want to engage both your architect and civil engineer who will be working together to make sure that you're maximizing your site potential in every way possible your architect will help you re-imagine the aesthetic appeal of the building through redesign updating selections and more they'll also help put together your floor plans and any renderings which can really come in handy if you're looking to market and potentially pre-lease or pre-sell some units your civil engineer will dive into all of the utilities storm water retention and drainage and anything else that has to do with the horizontal site work essentially your engineer prepares the dirt and your architect prepares the building after that you'll want to settle any legal issues while you're working on financing diving into the operations inspecting the property and working with your various project consultants your real estate attorneys will be working in the background to be sure you're covered legally not only will they review all of the documents provided by the seller which i highly recommend you have them do but they'll also dive into the title work to ensure that you're buying a piece of property that the seller can actually sell if there are any issues that are brought up from a contractual standpoint such as easements that weren't expected or disclosed leases that have expired or are outdated or otherwise your attorney will be able to assist you in clearing up these matters you'll also want your attorney to review the loan documents provided to you by the bank as they can help negotiate out some of the more unfavorable loan terms finally time to close you've now reviewed and fully satisfied the five main due diligence sectors environmental financial operational legal and physical now that you have enough confidence in the property that you're acquiring it's time to close the deal you'll find a link in the description below for the due diligence checklist download which will help organize and recap everything that we've covered here today when you're going through the due diligence process it's critical that you understand how to properly underwrite a commercial investment check out this video here to learn how i underwrite my deals along with the software that we use to do so