What Is Commercial Due Diligence?

K.C. Bruning

Commercial due diligence is the regular practice of investigating several elements of an entity in order to ensure that it is marketable and in line with local regulations. The method is used most frequently in real estate. Due diligence can be performed by a lender, manager, seller, or buyer. A typical review would include an evaluation of structural, environmental, and systematic areas. Issues such as compliance with zoning laws and building code are also usually examined.

Due diligence can be performed by a lender, manager, seller, or buyer.
Due diligence can be performed by a lender, manager, seller, or buyer.

The practice of commercial due diligence may be performed as a matter of routine or in anticipation of a sale. In many cases, it is simply a regular part of the process of owning, buying, or selling property. There are other situations where due diligence may be performed because a potential problem has been uncovered or a buyer believes that a property owner has overstated value and further investigation is required.

In order to perform commercial due diligence from a marketing standpoint, the investigator will review both the entity’s past performance and project how it can be expected to perform. A typical assessment would be based on the goals of that entity balanced against market conditions. Thorough review will take into consideration competition, inherent weaknesses in the entity and the overall economic client. Research may also be focused on past issues that could have weakened the marketability of the entity.

A review of the state of the property may also be included in the commercial due diligence process. This can include examination of physical elements such as building structure; electrical systems; roof; and heating, ventilating, and air conditioning. The overall process of examining a property is commonly known as a property condition assessment or PCA.

Commercial due diligence can also include an environmental review of the site. These are commonly referred to as phase I and phase II assessments. The phase I assessment includes an investigation of potential contamination or sources of contamination in any air, land, and water on or surrounding the property and in the structure itself when relevant. A phase II assessment is performed when there is believed to be contamination. It consists of laboratory tests of elements from the surrounding and internal environment in order to determine if there is a problem.

A commercial due diligence review can also include a report that outlines both what improvements are needed in the short term and projects that will need to be done in the future. This kind of report can include detailed costs, scope of work, and time tables. Some lenders require the disclosure of this information.

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