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Commercial Real Estate Due Diligence


Commercial Real Estate Due Diligence

The commercial real estate due diligence process comprises multiple professional services to assist buyers and sellers when engaging in good faith transactions. These are usually a suite of different services, that require experts and professionals to address any potential risk factor of the property. For example, most properties require a professional evaluation of the existing building functionality, framing and foundation quality, geological risk, environmental liability, legal concerns, and more. And modern-day transactions can require one or more of these services. This post provides a brief description of the common commercial real estate due diligence services.

1). Appraisal & Commercial Real Estate Valuation Report

An appraisal report is a price-value assessment of the commercial real estate, basing on current land-use and conditions. This is a basic part of the commercial real estate due diligence process, and is also called a “commercial property valuation report.” Typically, this assessment is a requirement upon sales, title transfers, mortgages, taxes, insurance policy generation, or development. Much like the other commercial property due diligence reports, the information within an appraisal report informs buyers, seller’s managers, and investors to make better financial decisions.

2). Transaction Screen Assessment

A Transaction Screen Assessment is a very basic commercial real estate due diligence report, with similar intent as a Phase 1 ESA. In most cases, a Phase 1 ESA is the requirement for commercial real estate sites. However, when properties are extremely low risk, there could be a dilution of the due diligence process, in the form of the transaction screen assessment. Unlike a Property Condition Report (PCR), the transaction screen gears towards contamination risk. Moreover, it provides an outline or brief on historical land uses that might be capable of causing contamination to a property. Depending on the results, a Phase 1 ESA may then become a requirement for completion.

3). Lead in Paint Survey

Lead is a toxic metal that has proven health effects on the human body. Much of the paint which exists in structures today includes lead. In fact, lead typically exists in wall paints varnishes and other types of cosmetic coating. In general, and per the industry-standard guidelines lead in most buildings is not a considerable “immediate hazard.”  Although, per many building departments and agencies, lead-containing products require testing and maintenance of quality/condition, to ensure that it does not become deteriorated. And on some occasions, this topic can be covered by Phase 1 ESAs.

4). Phase 1 Environmental Site Assessment

A Phase 1 Environmental Site Assessment is another component of the commercial real estate due diligence process. Similarly, Phase 1 ESAs follow an ASTM standard. However, unlike a Property Condition Report, a Phase 1 ESA report focuses on the environmental risk regarding past and present land use. Additionally, the Phase 1 ESA process incorporates an analysis of nearby environmental risks. And it provides an analysis of the impact on the subject property itself from nearby lots. Altogether, the Phase 1 ESA provides conclusions and recommendations pertaining to the potential risk of contamination on site.

5). Phase 2 Environmental Site Assessment

A Phase 2 Subsurface Investigation is a preliminary screening of shallow subsurface conditions. The premise of a Phase 2 ESA is to test for contamination, per the recommendations of a Phase 1 ESA. A Phase 2 ESA typically tests soil, soil gas, and groundwater for pollution. If detectable contamination exists above screening levels, there may be a reasonable indication that the property has a larger contamination issue exists.

6). Asbestos Survey

An Asbestos Survey report is a sampling event and technical memorandum that determines the presence and quantity of asbestos-containing materials at a property. The term “asbestos” is the nomenclature applicable to various naturally occurring silicate minerals. Asbestos-containing materials also refer to as “ACMs,” and potential asbestos-containing materials refer to as “PACMs.” This material derives from mining operations and applies best for thermal insulation and heat transfer stability. Moreover, asbestos has high strength for building material applications. In fact, most construction materials in commercial real estate buildings across the country already contain some asbestos. Almost all building thermal system insulation, and most old interior and exterior surface materials, are also asbestos-containing.

7). Radon Testing

Radon testing can be part of the commercial due diligence services, depending on the site location. The US EPA provides a Radon gas hazard map, to aid building code adaptations. There are three Radon Zones: Radon Zone 1, 2, and 3.

8). Mold Testing

Various levels of mold testing and abatement apply to commercial real estate. Most commercial real estate due diligence reports comprise a basic and preliminary visual inspection for obvious signs of mold growth. Mold grows in areas with constant moisture, such as humid environments, and include spores for easy reproduction in the right setting. Excessive moisture or water on indoor flooring and baseboards can be a safety hazard for mold growth. Other building materials such as drywall, wallpaper, particle-wood baseboards, and wood-based framing can also be affected by mold, compromising it’s structural and aesthetic integrity.

9) Property Condition Report

A Property Condition Report is a professional evaluation of the overall quality of a property, as well as its on-site structures, fixtures, and developments. This is an important part of the commercial real estate due diligence process because it allows the buyer to understand which aspects of the property need repair or maintenance. Moreover, a PCR report provides the buyer with cost estimates to make such repairs and corrections.