Performing the appropriate commercial real estate due diligence before purchasing is an essential part of successful real estate investment. Due diligence can help you avoid any potential costly and unpleasant surprises when you take ownership of your new property. In this series of blogs, we will look at the key items in a buyer’s due diligence checklist: title insurance and surveys; building and environmental inspections; zoning and existing leases; and financing.

Building Inspections

The second step in your due diligence checklist is to perform building inspections. The most important inspection you need to get before purchasing a new commercial property is a building inspection. This tells you the current condition and adequacy of any structures and other operating systems on the property. It will also detail any maintenance, repairs, upgrades, or replacements which are needed on the property. The typical commercial building inspection will look at the following: structure, building envelope, interiors, heating and cooling systems, ventilation, electrical and plumbing systems, fire suppression and other safety systems, landscaping, and storm water drainage. Inspectors will also typically call attention to any regulatory or statutory violations that they notice on the property.

Even if the seller provides you with as-built plans and other structure specifications, you should still engage a certified third party to conduct an independent inspection of the property. It’s often a good idea to look for a reputable inspection company that is local to the area in which you’re purchasing real estate as they will be aware of local building codes and any special conditions or problems that are common in that particular region or climate. Your lender or broker may even be able to recommend a reputable inspector for you to contact.

Environmental Inspections

The scope of environmental inspections is determined in large part by the past, present and future uses of the property. The two common types of environmental inspections are Phase I and Phase II environmental impact assessments. A Phase I assessment is generally necessary when a property will have a change in usage; a new or potential owner wishes to understand the history, and potential toxicity, of a property; or if a regulatory agency believes there may be toxic conditions onsite. A Phase II assessment is only conducted once a site is considered to be contaminated and generally involves actual samplings of such things as soil, air, groundwater, and building materials.

For a Phase I assessment, the site examination can include the following: defining chemical residues within building structures, identifying possible sources of asbestos, inventorying any hazardous substances used or stored onsite, assessing mold or mildew, and evaluating indoor air quality. In addition to the site examination, the scope of a Phase I assessment often encompasses a number of wide-ranging items: an evaluation of risks posed by neighboring properties; interviews of past and present owners, managers, and tenants; and examination of public records (e.g., planning files, aerial photos, USGS maps, chain-of-title, etc.).

In addition to providing you with important information regarding the condition of a property and the cost of either maintaining or rehabilitating it, inspections can be a crucial negotiating tool in a commercial real estate transaction. They also give you an idea of how much additional money you may need to borrow if the property requires some amount of rehabilitation before it can be used, or if remodeling is necessary to change a property’s use.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.