Due Diligence for Commercial Property
Whether you are a seasoned real estate investor or new to the game, buying a commercial property can be both exciting and stressful. Engaging good consultants to assist you with your property due diligence investigation from the beginning of this process is important.
What is due diligence?
Due diligence is the process of doing your research, investigating, and double checking the property before you decide to buy it.
Generally speaking, it can be broken down into three different parts – physical or technical inspection, financial due diligence and of course, legal due diligence.
1. Physical or Technical Inspection
You will need to engage a building inspector to physically look around and check the property that you are interested in from its walls, plumbing, foundations and so on. Try to secure copies of site plans from the seller if possible and give them to your inspector. Below are some of the issues your inspector should look at for you:
· Structural inspection – this involves checking the property’s structures such as walls, roof, and its foundations.
· Interior inspection – this involves checking the property’s interiors including doors, windows, and weatherproofing.
· Exterior inspection – this involves checking the property’s exteriors including the roof’s age, and other site improvements.
· Mechanical and electrical inspection – this involves checking the property’s systems in place such as heating, ventilation, plumbing, air conditioning, and electrical systems.
2. Financial Investigation
Engage your accountant to you check the financial health of the property that you are buying including:
· GST – how the GST has been previously treated so you can assess the application of the margin scheme if relevant.
· Lease and outgoings payable by tenants – if this is an investment property, the amount of rent and outgoings payable by your tenant has to stack up.
· Land tax – check to see if land tax is payable, and if so, how it may affect you if you have an existing property portfolio.
3. Legal Due Diligence
Engage your lawyer to undertake their legal due diligence investigations of the property. Some items your lawyer will look at are:
· Title search – ensure the seller is the right owner of the property.
· Easements – check to see if there any easements which may need further investigating.
· Caveats/Writs – check to see if the property has any caveats or writs registered against it which will need to be released on or before settlement.
· Lease and tenancy agreements – if there is a lease in place, you need to review the terms and conditions of those agreements with a focus on the term of lease, amount of rent, outgoings, make good obligations on the tenant and if there is an security such as security bonds or personal guarantees from the tenant directors.
· Main roads search – make sure the government does not have any plans of putting a road through where your property is situated.
· Environmental issues – you will want to do a contaminated land search to see if the site is contaminated or on the environmental management register. An environmental expert or town planner can also check the historic use of the property and the properties nearby (i.e. a chemical factory nearby might pose a potential issue on your property), its current use in relation to its zone, the regulatory requirements such as fire safety statements and occupation and development certificates.
· Council search – is the property subject to any orders or complaints from the local or state governments. The council search will also provide financial information on the rates and possibly information on any infrastructure charges which may be unpaid i.e. the seller has to contribute to some council costs for infrastructure which is in place to benefit the seller.
· Land tax – is the property subject to land tax and if so, the amount that will need to be adjusted at settlement so you are not left with a land tax bill.
· Energex – is power connected to the property, and if so where is it situated.
· Company and bankruptcy searches - these will show if the seller is a company, whether it is subject to any external administration or if the seller is an individual, whether they are currently, or were previously bankrupt.
