Due diligence checklist for buying commercial property

General information, not tax or legal advice. The numbers here are illustrative. Talk to your lawyer and accountant before you act on them.

Title and legal

• Title search: owner, mortgages, liens, easements and covenants.
• Survey or site plan, if available.
• Any legal disputes involving the property.

Leases and tenants

• Every lease, amendment and side letter.
• Rent roll: tenant, area, rent, term, renewal options, deposits.
• Estoppel certificates from tenants confirming their lease terms.
• Arrears and any disputes.

Financials

• Two or three years of operating statements.
• Property tax notices and assessments.
• Utility bills and service contracts.
• Recoveries: what tenants pay back and how it’s calculated.

The building

• Building inspection: roof, structure, mechanical, electrical, plumbing.
• Fire and life safety reports.
• Accessibility and any outstanding orders from the City.
• Hazardous materials survey for older buildings.

Environmental

• Phase I environmental site assessment, especially for industrial or older sites.
• Phase II if the Phase I finds concerns.

Zoning and permits

• Current zoning and permitted uses.
• Permits for past work.
• City plans for the area.

Strata units

• Form B, bylaws, minutes, depreciation report, budget and insurance.

Financing and insurance

• Lender appraisal and conditions.
• Insurance quotes.

Before you pay for reports

• Walk the property and ask questions first. Obvious problems shouldn’t be a surprise after you’ve paid for inspections.
• Read the operating statements as soon as the contract is signed. They can show problems the seller hasn’t mentioned.
• The usual inspections are pest, building systems, roof, soils and structure, and mould, lead and asbestos for older buildings.
• Get your own insurance quote. The seller’s may be on a blanket policy or out of date.
• Confirm the permitted use under the zoning before you remove conditions.
• Ask when permits were last pulled and what code issues are known, and budget for upgrades once you pull a permit.

Environmental, in more detail

• A Phase I reviews the site, its neighbours and its history. If it’s clean, you usually stop there.
• A Phase II drills and tests soil and materials. If it finds contamination, a clean-up plan follows.
• Lenders usually want at least a Phase I on industrial property, and a Phase II on current or former gas stations. Body shops, paint shops and platers are other warning signs.
• Land next to, downhill from or downwind of industrial sites can be affected too.
• In BC, contaminated sites fall under the Environmental Management Act. Search the provincial site registry, and ask the seller whether a site disclosure statement applies.
• Contamination doesn’t kill every deal. Price the clean-up, then decide.

Title, taxes and transfer

• Order a title search through the LTSA and review every charge: mortgages, liens including builders’ liens, easements, covenants and rights of way.
• Check the property tax notice for levies, local improvement charges and sewer fees.
• Budget for property transfer tax, which you pay when the transfer is registered.
• GST generally applies to commercial property sales. If you’re registered, you usually self-assess. See the CRA guidance on GST and real property and ask your accountant, especially for mixed-use.
• For strata units, also check special levies and any use restrictions in the bylaws.

Check that the rent is actually collected

A full rent roll doesn’t prove every tenant pays. Compare each month’s rent roll with the income actually deposited that month. Gaps show who pays late or not at all, and a building with weak tenants costs time and money to re-tenant. If the property is professionally managed, ask for the aged receivables report too.

Price deferred maintenance early

Repairs and replacements an owner has put off are called deferred maintenance. Walk every unit and space with a contractor or a property condition inspector, and price what you find. Deals often fall apart late because repairs turn up and the buyer tries to cut the price. Finding them early lets you negotiate once, on facts, before subjects come off.

Related: subject clauses and how to read a rent roll.

Questions people ask

How long is the due diligence period on a commercial deal?

It varies with the deal, often a few weeks to a couple of months. Set it to fit the reports you need.

Do I need an environmental report?

For industrial sites and older properties, buyers and lenders often require at least a Phase I.