Top 9 Due Diligence Contingencies in Commercial Real Estate Transactions
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Every real estate investment professional understands the “money is made on the buy.” It’s about nailing it at the acquisition phase which is often focused on the purchase price and for good reason. But we’ve come to learn over the years that
the sales price is only as good as the due diligence the transaction must stand up to.
Before managing the due diligence contingency process, a quality commercial broker needs to understand how to properly negotiate due diligence within the sales contract. If a due diligence item becomes a requirement during the contingency period and it’s not addressed in the sales contract, it can kill the deal. All parties to the transaction need to clearly understand the needed due diligence that must occur within specified timeframes.
It’s not uncommon for us to meet a commercial property owner who does not know what a Phase I or ALTA Survey is, much less have a copy in their file from when they purchased the building. Due diligence is not the most thrilling thing to talk about amidst the excitement of buying a building.
At RE/MAX Results Commercial Group, our brokers understand the hard work starts after the sales contract is signed. Effective due diligence management is critical to every deal and it begins upon the delivery of the purchase sales agreement. Escrow is opened, title commitment and property investigation studies are ordered and price quotes for all of the due diligence resources required are underway. That’s just the beginning. Due diligence is expensive and can be time-intensive. However, failing to do proper due diligence can be far more expensive.
Continue below to read more......
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Sleep Number
2257 Commerce Dr NW | Rochester
NEW CONSTRUCTION WITH CORPORATE
GUARANTEED 10 YEAR LEASE
LIST PRICE:
$2,400,000
- Lease Type - Double-Net (NN)
- Relocation Store - Sleep Number relocated from the Apache Mall (3.5 miles away)
- New Construction Site (2018) with a corporately guaranteed, 10 year lease with a 10% rent bump after Year 5 and a 20% rent bump at the first option period.
- Rapidly Developing Area - Six of the parcels immediately north of the subject property are currently in development; the 15-acre lot just north of Costco as well as two, 3 acre lots behind Costco; a brand new West Bank across the street; 17 parcels across 18 acres about 3/4 of a mile north of the site; and at least six hotel complexes are in development in the downtown Rochester area.
- Site is out parceled to a Costco and next door to an ALDI, along with other national tenants in the same shopping center: McDonald's, Sherwin-Williams, Goodwill, Associated Bank, MainStay Suites, Comfort Inn & Suites, Staybridge Suites and Kwik Trip. Across the street from CineMagic Hollywood Movie Theatre (12 Theatres), Spectrum, West Bank, Wells Fargo and Rooster's Barn & Grill.
For more information please contact
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We would like to wish Hayden and Megan Hulsey a big Congratulations on their August 31, 2019 wedding. Hayden and Megan have their home in St Paul with their new golden retriever puppy named Blu. Let’s all wish them well in their next chapter in life.
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Douglas Harris joined Results Commercial in 2017 and will complete his
CCIM
Certification in 2020. Doug helps clients sell, buy and lease commercial properties that will be used for business & investment purposes. He began his full-time career in real estate in 2013 after moving to Minnesota from Los Angeles in 2009.
Douglas Harris’s most recent work has been to secure the sale of an industrial building for a business owner of a school transportation business. This sale required a Conditional Use Permit, CUP, from the City to allow for this use. The city required several meetings and the promise of improvements to the property before they agreed to issue the CUP. In addition, a Phase 1 and Phase 2 were performed to be sure all environmental concerns were addressed.
Douglas has also successfully negotiated leases for several tenants for retail and office. One of his clients opened their first restaurant in Cottage Grove, another opened their first salon in St. Louis Park while another moved their music school to Mendota Heights. Douglas has several listings for which he’s currently negotiating the sale of three restaurants, a bar, an office condo, a movie theatre and a mixed-use building. Recent sales include two bank-owned buildings, as well as an office condo.
Douglas holds a real estate license in both MN and WI and will test for the CCIM Designation in April 2020.
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COMPLETED 1031 TAX EXCHANGE
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RELINQUISHED PROPERTY
SELLER REPRESENTATION
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VETERINARY CLINIC
2255 7TH AVE
NORTH ST. PAUL
$935,000
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REPLACEMENT PROPERTY
BUYER REPRESENTATION
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NET LEASE INVESTMENT
12400 LAKE BLVD LINDSTROM
$1,780,000
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The Choice - 254 2nd Ave N, Minneapolis
$1,650,000
North Loop free-standing retail property.
Seller Representation by
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7424 LYNDALE AVE S, RICHFIELD
This property will be working towards
redevelopment providing a 30 unit Multi-Family complex
to the thriving area of Lyndale Ave.
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9770 & 9880 MILITARY RD, COTTAGE GROVE
LIST PRICE $1,224,000.00
15.72 Contiguous Acres
Located off of Keats Ave S & Woodbury Dr
Surrounded by Recently Developed Residential Communities
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Top 9 Due Diligence Contingencies
in Commercial Real Estate
Transactions - Continued....
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Before I go into the Top 9 Most Common Due Diligence Items, let’s discuss a few key points. First, it’s important to know that if the property sale is going to have debt put in-place, then the buyer’s lender is going to be critical in determining what due diligence items will be required for their underwriting team. Second, each product category within commercial real estate has different due diligence requirements. Managing the due diligence process for a 50 unit apartment building is very different than a 65 acre land site zoned I2. Working through due diligence on a net-lease investment (NNN) is very different than a standard commercial deal.
Bear in mind,
the world of commercial real estate due diligence is enormous. The more you learn, the more you realize you have to learn. It’s nearly impossible to do this subject justice by discussing only the most common due diligence items, when each discipline within the due diligence spectrum is a deep specialty in and of itself. Regardless, the following items are the most common everyday due diligence issues we address with nearly every commercial investment property sale.
Now, let’s get on with the countdown.
1. Review of all property documents in the Seller’s possession
First things first, every buyer needs to start with the documents that the seller currently has in their possession including the survey, leases, title policy, notices from the city, etc. Not only is the information contained within these materials critical, but knowing what actual documents the Seller has in their possession is essential. For example, if there’s no need to order an ALTA survey when one exists in the file, that saves time and money for everyone.
2. Income/Expense, Lease & Estoppel Certificate Approval
For commercial investment assets, it’s all about the numbers and the quality of tenant in addition to their term. We need the real numbers to complete the financial underwriting and confirm assumptions made during the negotiation sales process. Rent rolls, Schedule E’s, P&L’s, Balance Sheets. Understanding every detail of every lease is essential. Here too, one poorly written or negotiated lease can easily cost the deal. After all, the purchaser is buying the leases, the income and the liability that comes with it. We work closely with real property attorneys during the lease review process.
3. Physical Assessment Report
This is the property inspection report which may include a single commercial building inspector going through the property top to bottom. Or, it may include taking through a series of building specialists for their respective opinions on building systems like the roof, HVAC, parking lot, or structural issues. Often during the physical assessment building inspection period, architects and contractors will also review the site for verification of usable square footage and to outline the capital improvement costs & project timelines. On most commercial transactions during the physical inspection period, we are looking for deal-killers big problems, not the leaky faucet in the restroom.
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DaVita Dialysis
5657 257th St, Wyoming, MN
$2,748,389 NNN: Net Lease Investment. National Credit Tenant. Cap Rate 6%. Contact
Mark Hulsey
for asset details.
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Sunbelt Rentals
Rogers, MN
$2,599,000
NN+: Net Lease Investment. 15,773 Building SF. Cap rate 6.70%. Contact
Hayden Hulsey, CCIM
for asset details.
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Jiffy Lube
West St. Paul, MN
$857,143.
NNN: Net Lease Investment. Lower price point for NNN. Cap Rate 7%
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Johnny Baby's
981 University Ave, St. Paul
$688,000.
Longtime established and well-operated St. Paul bar. Excellent stand-along corner building in University Ave redevelopment. Contact
Mark Hulsey
or
Doug Harris
for additional information.
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Bar/Restaurant - Former Hot Rod's
1553 University Ave W, St. Paul
REDUCED! $1,325,000.
In the shadow of Allianz Stadium, 10,300 SF, Bar/Restaurant opportunity. Opportunity Zone property.
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Northeast Mixed-Used
658 Fillmore St NE, Minneapolis
REDUCED! $499,500,000.
Unique Mixed-Use in PRIME Northeast Minneapolis. 2 residential units attached to vacant commercial store, Delmonico's.
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Mark, Hayden and their team at RE/MAX Results – Commercial Group assisted Peoples Bank Midwest with the sale of a vacant commercial building in Minneapolis. During the interview process, the depicted their experience with this type of property and stated that they would have numerous parties to show the property to. Shortly after entering into the contact with them to sell the property, they brought four parties through the building and we were evaluating offers within weeks. They worked quickly to close the sale and kept us informed every step of the way. We would highly recommend RE/MAX Results – Commercial Group should you be looking to move a piece of commercial property in a professional, efficient manner.
Richard McNamara
VP Commercial Lending
People's Bank Midwest
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RE/MAX Results – Commercial Group
RE/MAX Results – Commercial Group is a Top-Rated, Commercial & Investment Real Estate Brokerage Firm based in Minneapolis/St. Paul, Minnesota. Our seasoned and CCIM trained Brokers focus on Office, Retail, Industrial, Multi-Family / Apartments, Land, and Net-Lease Investments.
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Primary Offices:
748 Grand Ave, St. Paul, MN 55105
1609 Hennepin Ave, Minneapolis, MN 55403
5201 Eden Ave, Edina, MN 55436
604 Bielenberg Dr #100, Woodbury, MN 55125
11200 W 78th St, Eden Prairie, MN 55344
125 Lake St W, Wayzata, MN 55391
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RE/MAX Results - Commercial Group is a Division of RE/MAX Results.
Each Office Independently Owned and Operated.
Copyright @2019
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