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Due Diligence in Commercial Real Estate Transactions , Part 1

The overriding maxim in any real estate transaction is to conduct due diligence. Due diligence refers to the investigation and confirmation of facts during the negotiation phase. It entails reviewing financial records, inspecting the properties and, if necessary, interviewing people involved in the property. These methods ensure that any property you acquire will not generate any unforeseen events after you close the deal.

There are several levels of due diligence and it depends upon your goals with the project. If you are seeking to acquire the property, knock it down and build a new building then due diligence may require that you confirm you can get the necessary permits to start your construction project. If you are merely an investor looking to maximize a return on your investment, then you will want to examine the financial health of the company and the competency of the managers to run it.

The type of due diligence depends upon your end goals which determine the questions you should ask. What is the full extent of the contract? Are you purchasing a right to the entirety of the land, build and any other connected rights? Is this more limited? What rights do you have as an investor? Can you seek financial assistance from the seller if something goes wrong with the permit process?

A due diligence investigation should answer every single question as thoroughly as possible. Real estate transactions need to be vetted to avoid future surprises. These are long-term investments, you don’t want to risk your company’s solvency on a bad deal.

If your company is engaging in commercial real estate transactions then you may want to consider speaking with an attorney. As you can see, there are many unconsidered pitfalls in commercial real estate transactions. There are vulnerabilities during the contract negotiations and liabilities after the sale has concluded. An attorney can advise you on the various stages your potential risk exposure and how best to minimize it. It is far more cost effective to anticipate and correct problems than to react and solve them after they manifest.


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