Commercial Real Estate Due Diligence Checklist: The Documents Nobody Asks For Until It's Late
The rent roll, the T12 and the inspection report appear on every due diligence checklist, and buyers request them in the first week. The documents that cause trouble are the ones nobody asks for until the lender's closing checklist arrives, a week before funding, when there is no time left to renegotiate. Most of them cost nothing to request, but some take a seller a month to produce, which is the reason to ask on day one.
Service contracts often run with the property, and laundry leases, cable and internet agreements, and trash, elevator and landscaping contracts can all bind a new owner. Laundry and telecom deals in particular can run ten years or more, sometimes with a memorandum recorded against the title. Get every contract, read the assignment and termination clauses, and decide which ones you are willing to inherit.
Security deposits transfer with the building in most states, and you will owe them back to tenants whether or not the seller handed you the money. Ask for a deposit ledger by unit, reconcile it to the rent roll, and make sure the full balance shows up as a credit to you on the settlement statement.
The seller's bank statements test everything else, since twelve months of deposits should roughly match the rent collections on the T12. If they do not match, you need an explanation before you rely on the income. A gap of a few percent can come from timing, while a gap of fifteen percent usually means the income on paper never reached the bank.
Mixed-use buildings need estoppel certificates from every commercial tenant, whether that is a storefront under the apartments or a cell tower on the roof. Each one confirms the rent, the term, the deposit and any claimed defaults over the tenant's own signature, and a tenant who signs one cannot later claim the seller promised a free month you never saw. Lenders usually require them, and since tenants rarely return them quickly, request them the week you sign.
Insurance loss runs, the carrier's record of claims on the property, usually cover five years and tell you what your premium will be priced against. Repeated water claims point to plumbing problems, and a recent roof claim may mean the insurer paid for a roof that was never replaced.
Open permits and code violations travel with the property, so request the municipality's records for open permits, outstanding violations and the certificate of occupancy, and check whether any units were added or converted without approval. An unpermitted basement unit can turn into lost income and a fine in the same month.
Ask for the last three years of tax bills and any pending appeals, since a low tax line can reflect a value the next owner will not keep. In Texas, where owners commonly protest their appraisal district value every year, request the protest history and settlement terms as well, because last year's bill may reflect a negotiated value rather than the district's starting number.
Lenders require a Phase I environmental site assessment on most commercial loans, and Fannie Mae requires one on its multifamily loans. Order it as soon as you sign, because a recommendation for a Phase II, which means sampling soil or groundwater, can add weeks, and you want that news inside your diligence period instead of after it.
Send the full request list with your signed letter of intent: service contracts, the deposit ledger, twelve months of bank statements, five years of loss runs, permit and violation records, three years of tax bills and appeals, and authorization to order the environmental report. Put a delivery deadline in the purchase agreement and tie your diligence period to it, so the clock does not start until you have the documents in hand.
Once those documents arrive, the work shifts to reading them against the seller's numbers, because a contract, a deposit ledger or a loss run can each change what the property is really worth. I help buyers run due diligence on commercial and multifamily deals, reviewing the documents, testing them against the offering and building a model that reflects what the records show. If you are under contract or about to sign a letter of intent, send the deal to amer@awadcapitaladvisors.com, and I can help you find the problems while there is still time to renegotiate.