Real Estate Due Diligence
Real estate due diligence runs on a contractual clock. The deposit goes hard whether or not the reports arrived.
For acquisition leads ordering the review, and asset managers preparing for one.
What Real Estate Due Diligence Tests
Real estate due diligence answers 4 questions. 2 from documents. 2 from a site visit.
What exactly is being bought.
Title, boundaries, easements, encroachments, access. The surveyor and real estate counsel have to agree on the parcel.
Matters most to: real estate counsel and the lender
Does the income hold up.
The rent roll is the seller’s version. The estoppel is the tenant’s. Net operating income means nothing until the lease auditor reconciles them.
Matters most to: the acquisition lead and the appraiser
What condition is it in.
The building engineer sizes immediate repairs and the capital plan. The environmental professional decides whether a deeper investigation follows.
Matters most to: the lender and the building engineer
Can it be used as intended.
Zoning, permitted use, occupancy certificates, open violations. The business plan has to be legal before it is financeable.
Matters most to: the investment manager underwriting the plan
Documents answer in days. Site questions run on somebody else’s calendar, which is why they get ordered 1st.
Real Estate Due Diligence Document Checklist
13 groups. Groups 1 to 4 come from the seller. Groups 5, 6 and 13 have to be commissioned.
Asset managers: assemble this before going to market. Buy-side: this is the request list.
1.0 Title and ownership
Current, plus the last transfer
- ✓ Title commitment or preliminary report with all exceptions
- ✓ Vesting deed and the chain of prior conveyances
- ✓ Recorded easements, covenants and restrictions
- ✓ Encumbrances, liens and judgments against the property
- ✓ Owning entity documents and authority to sell
2.0 Survey and boundaries
Current, or ordered
- ✓ Survey to the standard the lender requires
- ✓ Parcel dimensions and building footprint
- ✓ Encroachments onto or from the property
- ✓ Setbacks, building lines and parking count
- ✓ Utility locations and street access
3.0 Financial performance
3 to 5 years plus trailing 12 months
- ✓ Operating statements and trailing 12 month performance
- ✓ Current year budget and net operating income build
- ✓ Property tax history and reassessment exposure
- ✓ Capital expenditure history by category
- ✓ Property tax returns or filings, to test the operating statements
4.0 Leases and tenancy
All in force
- ✓ Executed leases with every amendment, extension and side letter
- ✓ Certified rent roll with commencement, expiry and delinquencies
- ✓ Estoppel certificates from tenants by income contribution
- ✓ Subordination and non-disturbance agreements
- ✓ Security deposits held and expense reconciliations
5.0 Physical condition
Ordered, not supplied
- ✓ Property condition assessment with immediate and 5 year costs
- ✓ Roof condition and remaining warranty
- ✓ Mechanical, electrical and plumbing system age and condition
- ✓ Accessibility compliance review and remediation estimate
- ✓ As-built drawings and prior renovation records
6.0 Environmental
Ordered, not supplied
- ✓ First-stage environmental assessment and its findings
- ✓ Follow-up investigation where conditions are flagged
- ✓ Historic site use and adjacent parcel history
- ✓ Asbestos, lead and other hazardous material surveys
- ✓ Remediation orders, closure letters and ongoing monitoring
7.0 Zoning and entitlements
Current status
- ✓ Zoning classification and permitted use confirmation
- ✓ Variances, special permits and pending applications
- ✓ Certificate of occupancy for each space
- ✓ Outstanding code violations and open permits
- ✓ Entitlement status where development is contemplated
8.0 Operations and contracts
All in force
- ✓ Service and maintenance contracts with termination terms
- ✓ Property management agreement and its notice period
- ✓ Utility accounts and any shared metering arrangements
- ✓ Warranties in force on building systems
- ✓ Staffing arrangements that transfer with the asset
9.0 Insurance and claims
Current plus 5 years
- ✓ Policies in force with limits and deductibles
- ✓ Loss run and claims history
- ✓ Flood, seismic or other hazard zone determinations
- ✓ Insurability assessment where claims history is adverse
10.0 Debt and financing
All in place
- ✓ Existing loan documents and payoff or assumption terms
- ✓ Prepayment penalties and defeasance requirements
- ✓ Lender consent requirements on a transfer
- ✓ Coverage ratio position under the existing facility
11.0 Litigation and disputes
All open plus 5 years
- ✓ Tenant disputes, arrears and eviction proceedings
- ✓ Construction defect and contractor claims
- ✓ Boundary, easement and access disputes
- ✓ Property tax appeals in progress
12.0 Association and third-party rights
Where applicable
- ✓ Owners association or common area agreements and assessments
- ✓ Reciprocal easement and access agreements
- ✓ Ground lease terms and remaining term
- ✓ Rights of first refusal or purchase options held by tenants
13.0 Climate and energy
Increasingly lender-driven
- ✓ Energy performance rating and the measurement basis behind it
- ✓ Utility consumption and emissions data by year
- ✓ Retrofit obligations under current and announced regulation
- ✓ Estimated retrofit capex and the deadline attached to it
- ✓ Physical hazard exposure and its effect on insurance availability
- ✓ Green lease provisions and who funds improvements under them
Entity-level financials sit with the financial workstream[cite: 8]. Corporate records and contract assignment sit with legal review[cite: 8].
Real Estate Due Diligence Arrives as Reports
Surveys get revised. Assessments get reissued. Versions have to supersede cleanly.
The Diligence Period and the Ordering Problem
Real estate due diligence is the only workstream with a contractual deadline. Everything below has a lead time. The clock does not stop.
For the acquisition lead and the broker holding the calendar, this is the critical path.
3 ways the clock runs out
None of these is a diligence failure. All of them are scheduling failures.
Extend the period.
It costs something. The seller usually wants a larger or partly released deposit for the privilege.
Close without the answer.
The report lands after the deposit is committed. The finding becomes an owner cost, not a negotiating point.
Walk and forfeit.
Rare and the most expensive. Usually a flagged environmental condition surfacing too late to investigate.
An asset manager who assembled the file can agree a shorter period with confidence. One who did not spends the period answering document requests.
Red Flags in Real Estate Due Diligence
12 findings that move a price or a deposit. The 1st causes more retrades than the rest combined.
Brokers: clear the top 3 before launch. Buy-side counsel: price the rest.
The rent roll and the estoppel disagree
The tenant’s version wins. Every time.
Estoppels missing from the largest tenants
The income you are paying for is unverified.
Operating statements that will not tie to tax filings
Filings are harder to dress up than internal statements.
A flagged environmental condition, no follow-up ordered
The flag is not a reason to walk. It is a reason to investigate.
Survey encroachments nobody resolved
A boundary problem does not improve with ownership.
A certificate of occupancy that does not match actual use
The business plan may not be legal.
Deferred capital spend presented as a plan
A roof at the end of its life is a cost, not a project.
Undisclosed tenant purchase options
Your asset may already be promised to somebody else.
Property tax assessed on a stale valuation
Reassessment on transfer can reset the expense line.
A compressed diligence period accepted under pressure
The reports will not arrive. That is the whole problem.
A retrofit obligation with a deadline inside the hold period
Priced as an operating asset, owned as a construction project.
Insurers declining to quote on the asset
The market is telling you something the seller did not.
From Real Estate Due Diligence to Deal Terms
Property findings convert faster than any other workstream. Most arrive with a number already attached.
The last row is what real estate due diligence protects against. The others are negotiations. That one is a surprise the buyer owns.
7 Reviewers, 1 Real Estate Due Diligence File
Real estate counsel, surveyor, building engineer, environmental professional, lease auditor, appraiser, lender.
Real Estate Due Diligence by Deal Type
The checklist barely changes. The calendar, the parties and who commissions the reports change completely.
On an acquisition or portfolio sale
30 to 60 days for 1 asset, compressed to 3 weeks in a competitive process. Commercial real estate due diligence at scale runs the same 13 groups per property, with sampling on the smaller ones.
On a fund raise or REIT listing
Investors and underwriters diligence the whole estate at once. The asset manager assembles it, and an unresolved title exception on 1 property delays the vehicle.
On a financing or refinancing
The lender drives the list and commissions its own appraiser and environmental professional. Coverage ratios set the pace, not a purchase agreement.
A private equity portfolio exit runs the review across every asset at once. An insolvency sale runs it against a statutory clock. Explore our property transaction platform.
Frequently Asked Questions
The questions acquisition leads actually ask, in the order the deal forces them.
The buyer’s verification of a property before the deposit becomes non-refundable. It covers title, survey, income, physical condition, environmental status, zoning and the existing debt.
Real Estate Due Diligence Starts Before the Contract Does
Title, leases, statements, and reports in 1 indexed file. Ready for the acquisition lead on day 1, not week 3.