One important aspect of due diligence is to know your documents but specifically understanding the details of the lease, insurance policy, and title policy.  The lease, out of all of these is of utmost importance because it remains the roadmap for future events concerning the property.  Part of the issue with the lease is language.  There is a lot of strange stuff, interesting jargon presented in the terms of a lease.  Really I wonder when legal ease will be common enough for an ordinary person to understand.  Such examples of strange amendments to a generic lease include: First options on purchase, the right to take over adjacent space, tenant ownership of plumbing fixtures (really!), agreements for new carpet every year. Really anything is possible.

One would think that there is a cookie cutter answer to the common lease agreement.  It seems very few properties have what is commonly termed as a "standardized lease template" mainly because over the lifetime of the property management, the owner is faced with signing new leases and making concessions for each individual tenant.  Some tenants will be more nit picky than others.  Some tenant may agree to paint the living room or include other repairs that will amount to a profit for the owner in the long run but mainly benefits the existing tenant.  A lot of the time, much goes unnoticed by property managers and it is at the owner's discretion to know the lease backward and forwards.



Every word of the lease is crucial.  It is important that everything remain clear for both the owner and the tenant.  It is a good idea to have an outside party review the lease and compare notes.  If there are questions, please ask them and be straightforward about any concerns.  This process is usually so important that I do not let anyone else handle it.

It is in my best interest that I understand every detail of every lease.  Otherwise I am just setting myself up for failure with these tenants and sometimes even the owners.  Sometimes the owners don't even know the specifics of each lease.  That is why you need to ask questions and understand each situation.  It is the nature of the job that sometimes people tell me too much and I must remain objective. Still this creates a level of honesty I have come to respect of my clients.

Well as it happens with more and more questions come up things that the client remembers about the leases and something I may not have been aware of from the get go.  So I cannot stress enough how important to ask lots of questions in the process.  The way I see it is, this is a chance to find out about information that may not have already been discussed.

Remember to get a payment history from tenants.  This does not lead to many surprises.  For instance, if there is a problem tenant, someone who is consistently late with the rent, then I want to beware of that issue upfront.  If it is chronic problem, I may see the need to discount the cash flow, which in turn leads to a lower price offer. 

There is also the situation where the owner or property manager does not have a system to tracking the cash flow, or documentation of the rental payments, or even a way of verifying with their bank, this proves to become a much more risky situation for me and everyone involved.  Here too, the risk translates to a lower bargaining price.  It has been my experience that in these cases, the paperwork magically appears.

One can always tell a lot of vital information from the insurance policy, especially in the case of a building with some age.  Mind you, a lot of times insurance inspectors know all the tricks of the trade and if you are able to get a hold of the last risk assessment you will be ahead in the long run. You can request this from your client usually the insured is the owner but a copy is a must.  If it is at all possible, get a claims history as well.  This can be a grey area because lot of times, you will have to jolt the owner's memory and this can become issue if they changed carriers every year.  Here there is no real worry, people change insurance providers all the time shopping the best rate is so common but be cautious if they have failed to pay a policy.  What is best in this situation is to make sure the owner can get an affidavit discussing the truth of the claims represented as being complete to the extent of his knowledge.  This can be important for future possible litigation because many sellers want the warranties to survive closing. 

 When in doubt look to the existing title policy.  This will inform you the obvious information regarding easements, rights of way, etc.  Be on the lookout for any special exceptions to title. It is best to have a General Warranty deed if you can get one.  A smart seller will offer a Special Warranty deed as incentive, which will only guarantee title for the time they owned the property.

To further the argument, it is also important to keep in mind the amount of resources and the type of property when completing a due diligence process because some steps may not be warranted.  Really when it comes down to it, there is no other proper substitute for due diligence, but this does not stop people from not understanding its importance. No property is perfect and unfortunately there is no way of preventing this without further investigation. In the long run it protects all parties.  Depending on one's needs, it is fair to say that each transaction will decide what level of due diligence is needed.  There are companies out there that all they do is specializing in this practice.

There are many factors that can predict the success of commercial properties and their tenants.  Unfortunately such properties are victim to suffering quick economic distress.  One day the building is at 100% occupancy rate and then overnight becomes 50% with the bankruptcy of a large tenant, because that tenant's business may be dependent on market factors overseas.

Therefore it is important to assess the risk involved with each tenant.  This better defines their likelihood of the continuance of the income stream from a commercial property, you have to figure out the underlying quality of both the tenant base as well as the physical asset, and that's what due diligence is all about.
This can be a complex balance of examining rent rolls, payment histories, and credit files of existing tenants.  All of which can be very eye opening to say the least but it allows you as the owner to assess the risk leasing to this tenant.  Once again it is important to ask the right questions and listen to them. Only by open communication can you get a better picture.

Still there will be times that even you do not have all the answers even after the most complete due diligence process.  Still this helps you in presenting the clearest picture regarding that property.  In this way, you have the power in knowledge and understanding the situation and the best possible solution. This all reflects upon you as a professional.  It is also a good idea to bounce these presentations off a co-worker or someone with experience in the business.  They will be able to give you pointers and advice that maybe you didn't already know.  There will always be that one property that just doesn't make it to the closing and will always has problems no matter how many solutions you find.  Be prepared to have a tough skin.