Due Diligence 101 in Commercial Real Estate

As a 40 year veteran of commercial real estate I have been called the "Broker's Broker". This phrase was not accomplished by my longevity in the business but my years of selling, leasing and developing commercial real estate.

Assume for a moment that one has employed a commercial real estate broker/agent who is backed up by a real estate lawyer.  Standard of Care is what is expected from both the attorney and agent. The Standard of Care is the client’s expectation of the real estate professional’s skill and care utilized to protect their client’s interests in the proposed transaction.

The agent should provide the client with all of the pertinent facts of the property.  What is known and should be known by the professional. For instance, does everything in and around the premises work and is it in at least fair condition? Are there any past or present environmental issues no matter how insignificant that should be disclosed?

Does the current owner intend to sell the property in the near future if it is a property lease? Are there surrounding tenants that may be an issue for the buyer/tenant? Are there any code violations at the property? Were there any improvements built without permits?

My general rule when representing a party is to ask numerous questions of either the broker or the owner of the property. I demand to know about all instances of the property having a problem, even though it has been mitigated. Any surprises should be pleasant ones during the buyers or tenants occupancy and not a nightmare.

The lawyer should always craft the contract to provide the buyer ample time to do inspections of the property and warranty the systems in the building for some period of time.  In addition, the lawyer should follow the same checklist as the broker.

My personal checklist in buying or brokering a transaction is to complete careful inspections of the property. I never rely upon an inspection service or "jack of all trades" contractor with numerous years of experience in the business. The inspection services can provide you with limited services and may pick up code violations; however, the buyer should never completely rely upon one person.

It is best to invest in several subcontractors such as plumbers, roofers, electricians, heating and air conditioning contractors, fire sprinkler inspections, earthquake retrofit contractors, and paving/concrete contractors. Also, last but not least a reliable landscape contractor to investigate the irrigation lines and landscaping.

The final phase of due diligence is to take a trip to the building and planning department in the city. If the buyer feels insecure about making the trip to City Hall, employ an architect to do the research. The buyer must know if the zoning is appropriate for the business use. Are there any code violations that were not disclosed to them, is there any re-zoning that is contemplated for the area, are there any applications pending for conditional use permits in the area which may detract or limit the use of the premises.

My last and maybe my best recommendation is take several photos of the interior and exterior portions of the property. Some individuals are now employing videographers to document the current condition of the property. Whichever method is employed, the visual photos or films are great insurance for possible future issues. The buyer, lessor or lessee should take the photos or films and place them with the lease or purchase contract and put them in a safe place.

In conclusion, if a buyer follows my recommendations in the above text, he or she is bound to have very little or no surprises in the future.  It sounds like a massive amount of work which I feel is necessary because this is the future home of your company.

“I was looking for a new business space and needed a real estate broker with a keen understanding of the Los Angeles market. Lee Segal understood what we were looking for and what was important to us; he even took the extra step of anticipating how the situation might serve us in the long run. Thanks to his professional advice, we found the perfect space for the company. I will definitely work with him again if I have real estate needs in Los Angeles.”  
Joachim Wekenmann, General Manager for Weckerle Cosmetics USA