What Should Commercial Property Due Diligence Cover?

Most commercial purchase agreements give the buyer a defined study period during which the buyer can terminate for any reason and recover the deposit. Once it ends, the deposit usually goes hard and the exits narrow to title objections and seller defaults. That makes commercial property due diligence the most valuable window in the deal, and the work has to be ordered on day one, because surveyors, environmental consultants, and zoning offices run on their own schedules, not yours.

Title and survey

Order the title commitment immediately and read Schedule B, which lists the easements, covenants, and other recorded matters the policy will not insure against. Order an ALTA/NSPS land title survey at the same time, with the Table A items you need (improvements, easements plotted, parking count, flood zone, zoning classification). The survey shows whether the building sits inside its lines, whether a recorded easement crosses the loading dock, and whether the property has legal access to a public road. Most contracts set a deadline for a title objection letter; calendar it, because objections sent after the deadline are waived. Our note on what an owner’s title policy covers explains the endorsements (zoning, access, contiguity, survey) that a commercial buyer should request.

Zoning, permits, and entitlements

Confirm that the current use is permitted, either by right or under an approval that runs with the land, and that your intended use is too. A zoning verification letter from the local jurisdiction states the classification, any known violations, and whether the property conforms. Pull the certificates of occupancy and check for open permits and unresolved code violations, which transfer with the property. If you plan to expand or change the use, the approvals you will need belong in the study period, not after closing; our summary of zoning approvals for development projects describes the paths and what each requires.

Environmental

A Phase I Environmental Site Assessment, performed to the current ASTM standard, is the baseline. It reviews records, interviews, and a site visit to identify recognized environmental conditions. It is also the step that preserves the buyer’s defenses to federal cleanup liability, and those defenses depend on the assessment being completed before acquisition and being current, with certain components updated if more than 180 days old and the report itself no older than a year at closing. If the Phase I flags a condition, a Phase II with sampling follows, and that takes time the contract may not allow without an extension. Asbestos, lead paint, underground storage tanks, and wetlands each carry their own review.

Leases, tenants, and income

For income property, the leases are the asset, and our acquisitions and leasing team reads every one of them against the rent roll. The review covers:

• the rent roll reconciled to the actual leases and amendments, including free rent, options, and expansion rights;
• estoppel certificates from tenants confirming the rent, the term, the deposit, and the absence of defaults or landlord obligations;
• subordination and non-disturbance agreements, which the lender will require from major tenants;
• security deposits and letters of credit to be transferred at closing;
• operating expense reconciliations and any tenant audit rights or disputes;
• rights of first refusal or first offer that could affect the sale itself.

The income the seller reports should match what the leases allow. A tenant paying below the stated rent, or a lease with a termination option the broker’s package did not mention, changes the value. Our comparison of triple net and gross leases explains why the pass-through structure matters as much as the base rent when you underwrite the building.

Physical condition and operations

A property condition assessment by an engineer covers roof, structure, building envelope, mechanical, electrical, plumbing, elevators, and accessibility. Pair it with the seller’s service contracts (which are assumable and which can be terminated), equipment warranties, utility bills for the last few years, insurance loss runs, pending litigation, and the real estate tax history including any pending assessment appeals. Confirm flood zone status, since it drives insurance cost. If the building has a parking structure or a central plant, budget for a specialist report.

Seller, authority, and the exit

Finally, confirm who you are dealing with. Review the seller’s organizational documents for authority to sell, check for liens and judgments against the entity, and determine whether the seller is a foreign person for withholding purposes; our note on FIRPTA withholding explains the buyer’s obligation. Then manage the deadline itself. Know how the study period is counted, deliver any termination notice in the manner the contract requires, and ask for an extension in writing before the period runs out if a report is late. A buyer who lets the period lapse while waiting on a Phase II has made a decision without meaning to. The length of the period and the extension rights are fixed when the contract is signed, which is why our real estate contract negotiation team pushes for them before the deposit goes in.

If you are under contract on a commercial building and the study period is running, a consultation with Capitol Law Partners can set the diligence plan and the deadlines in the first week. Schedule a consultation.

This article is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by this communication.

Attorney Cagatay Ersoy. Practical strategy for founders, investors, and growing companies.

Need help with this topic? See our property acquisitions and leasing page or schedule a consultation.