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Financial Due Diligence Steps for Commercial Real Estate

Posted on: January 12, 2016

Any successful commercial real estate deal will require several due diligence steps. Financial due diligence encompasses several of them. As important as financial due diligence is for any potential commercial real estate deal, it is sometimes completely overlooked, rushed or otherwise performed inaccurately.  

A South Florida commercial real estate attorney can give you detailed advice on the most important financial due diligence steps that you should perform prior to closing a commercial real estate deal. Some of these steps are briefly described below.  

Gather real financial data

It’s extremely important to obtain real operating costs and numbers rather than projections. Real numbers are always the safer bet and give you the best picture of the current and future potential earnings of a commercial property.

Pro forma income and expense statements are often provided by sellers in lieu of detailed statements, but they are often used to mask the reality of a particular property. For example, “Gross Potential Income” is sometimes provided on a pro forma statement — this refers to the maximum potential income if all of the units of the property are rented and collected every day of the year.

In reality this is typically not the case. A commercial property may have one or more units vacant during a substantial part of the year, and a carefully constructed pro forma statement would help to cover that up. Clever sellers often trick buyers into purchasing commercial properties that are not in their in best interest or sell the idea that a property is a lot more promising than what it actually is.  

If any of the financial data of a deal is confusing to you, or if you just want a second set of eyes to review it, be sure to contact a knowledgeable South Florida commercial real estate attorney for help.

Gather every document for income verification

Always get a copy of every existing lease related to the property. Also be sure to request rent rolls, which are basically a summary of the leases. A typical rent roll shows the name of the tenant, their rent, their payment history, balances, and other relevant details. Tenant files can reveal other important information such as the credit of the tenants, details about their finances and more.

These are some of the main points of financial due diligence, but there are several other potential steps that you may need to take depending on the type of commercial property that you are buying. A South Florida commercial real estate attorney can walk you through the most important steps and ensure that nothing is overlooked.

To learn more about commercial real estate financial due diligence or to ask any questions that you may have, contact Mark Schecter by calling (954) 779-7009.