Location is a key factor in purchasing commercial property. You want to ensure the building or space is situated in an area conducive to business activity. But it isn’t only the factor you have to prioritise—you also have to think of the condition of the property, its size, its price and whether it has a clean title. So before you sign anything, it’s best to practice due diligence. We have created a quick yet comprehensive due diligence checklist for buying commercial property to guide you.
Location & Zoning
The property location impacts every detail of your business—from your staff’s commute times and your availability and access to needed amenities & vendors. Besides foot traffic, parking and public transport, check these in your target location:
- Crime rates: Check the area’s crime rates to ensure you will run a business in a safe neighbourhood. You don’t want your customers and staff to be at risk of theft or any other violent crime.
- Proximity to amenities: Is it close to schools, restaurants or shopping centres? If yes, see if the demographics that frequent those amenities are similar to target your audience. Otherwise, you might want to explore other locations. Also, is the property location relatively near to your suppliers and vendors? It can be difficult to run a bake shop where you have to travel hours to secure a week’s supply of flour, sugar or all of your ingredients.
- Zoning regulations: Check with the local council to see if the property is zoned for commercial use. This way, you can prevent potential zoning issues that may cost your business a lot.
No matter how you adore the property, get a professional building inspection to assess its structural condition. You have to know whether it needs commercial building repairs or renovations, as these should be taken into account in the total price. Otherwise, every repair you make after the sale will impact your profits.
Also, having complete knowledge of the property’s condition can give you a better understanding of its current and potential resale value. If the projected repair costs are high, you can walk away from the deal right there and then. If the inspection says otherwise, you can be smart about renovations to beef up the resale value.
The title is a vital real estate document as it proves the property ownership. It includes the names of the current and previous owners, any easements or rights of way and any liens or encumbrances. Check whether the title is clean or has liens or encumbrances that will only lock you into an agreement full of financial & legal battles. Make sure to have an experienced real estate lawyer guide you on this.
Apart from a real estate attorney, you need an accountant to guide you with your due diligence checklist for buying commercial property. Ask your accountant to check if there are tax implications in owning the property. Real property taxes vary from state to state and can change over time. You must stay updated on the latest rates to make an informed decision and acquire a profitable property.
Are you planning to buy a multifamily or commercial property with existing tenants? Check their leases to find out what the terms are and how long their leases are. That way, you have an idea of the expected vacancy rates by the time you take over.
Say the current tenants have favourable lease terms. They are likely to stay in the building for years to come. But if the terms aren’t good or are due to expire soon, you have to consider the cost of replacing that tenant during the takeover since a unit that remains unoccupied for months or years can hurt your income. If you have to look for tens of tenants by the time you take over, it might be better to walk away from the deal as early as possible.
Don’t forget about the outgoings that are payable on the property. These may include water charges, council rates and body corporate levies. You don’t want to buy a commercial property with a long list of payables that can affect its profitability. So before you end the due diligence checklist for buying commercial property, make sure to dig deep about outgoings.