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The Definitive Real Estate Due Diligence Checklist (And How to Digitize It)

Matt Carrigan

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This blog post was last updated on Wednesday, October 12th.

Before finalizing a new acquisition, development, disposition or lending deal, the due diligence process allows investors to thoroughly vet the deal, ensure that it aligns with their investment strategy, and identify any potential red flags. A thorough due diligence process acts as the final buffer between underwriting, often driven by data analytics, and capital deployment. While a critical risk mitigator during the late stages of a deal, due diligence checklists are quite thorough, sometimes to the point that they become overwhelming. Read on to learn about the essential due diligence checklist items to bear in mind, as well as helpful tips for migrating this list to a cloud-based software.

What Is Due Diligence in Commercial Real Estate? Breaking Down the Process

Investors rely on real estate investment due diligence checklists to ensure that they’ve identified all potential risks a new deal holds. Throughout this process, the goal is to identify and understand any red flags or concerns that could threaten the deal’s projected ROI. 

All firms follow a unique real estate due diligence process that’s shaped by their own pipeline management process, investment strategy and risk tolerance, as well as special considerations based on the deal type and other specific factors. For simplicity’s sake, this list will break down the generalized commercial real estate due diligence process into two phases: the preliminary checklist, and the more formal underwriting process that comes later on. 

Preliminary Checklist

Deal teams work scrupulously to ensure that no stone is left unturned throughout the due diligence process. The preliminary stage is the first round of thorough inspections into regulations, tax implications and other factors that could preclude profitability, as well as gathering all relevant due diligence documents. By illuminating potential issues early on, investors can pass on unworthy deals before devoting valuable time. While all investments include due diligence, these processes are catered toward traditional building acquisition deals and land purchases.

Throughout your preliminary real estate due diligence process, review or address the following items:

  1. Current title policy, along with other related due diligence documents
  2. Development and construction plans, including as-built, architectural, engineering, and any other relevant plans
  3. Property condition report
  4. All government-issued documentation relevant to the building, including permits, certificates of occupancy, warranties, government notices, special assessments, code violations and unexpired guaranties
  5. Property tax bills within the last three years, which includes special assessments and incentives
  6. Energy and utility bills from the prior two years
  7. All relevant environmental and energy reports 
  8. Capital expenditures
  9. Documentation of any personal property currently on the land
  10. Add costs for identified issues to determine potential costs

Following these steps, investors generally understand enough about the property to determine if the property is aligned to their risk profile. If properties pass this phase of the process, they may move on for a more detailed evaluation.

Site Underwriting Due Diligence Checklist

Further along in the deal lifecycle, investors perform the site underwriting process. This second leg of the real estate due diligence process is the final opportunity for investors to vet the property and learn everything they need to know. 

Because the site underwriting process typically involves a deep dive into the property’s legal and financial standings, it can involve multiple parties and take a month or more to complete. 

While underwriting the property, review or address the following items:

  1. Insurance policies currently in place, as well as any filed claims
  2. ALTA (American Land Title Association) survey, as well as other topographical surveys
  3. All impending and in-process litigation that could impact the future property owner
  4. Letter of intent and client authorization letter
  5. Site inspection to investigate the property’s location within the market, accessibility, and to gain first-hand insight into other variables 
  6. Review the purchase contract
  7. Review the property’s legal description
  8. Review the zoning compliance certificate
  9. Current liens
  10. Encroachments from neighboring properties
  11. Recent or past appraisals of the property
  12. Review pro forma information
  13. Review any binding legalities governing how the property can be used, including covenants, conditions, restrictions, reservations and easements 
  14. Request a profile of the existing tenant or tenants, which includes their credit ratings
  15. Review current tenant leases and abstracts, including amendments 
  16. Review SNDAs (subordination non-disturbance and attornment agreement) currently in effect, unless the property is a multifamily unit
  17. Review up-to-date rent roll including expenses ancillary tenant expenses, such as security deposits, real estate taxes, security deposits and CAM billings 
  18. Review service contracts to determine if cancellation incurs penalty expenses
  19. Review tenant sales report, aged receivables report and a list of security deposits
  20. Interviews with current tenants
  21. Interviews with the local municipality 
  22. CAM (common area maintenance) recommendations for how tenants should contribute to building fees
  23. Confirm parking aligns with government regulations, as well as practical and contractual needs
  24. Demographic research and analysis of the surrounding area
  25. Perform a competitive analysis
  26. Compare selling price against deal comps from similar opportunities
  27. Compare lease financials against similar deals
  28. Perform a year-over-year cash flow analysis 

After exhausting this list, investors generally know everything they need to in order to make a final determination on the deal’s potential before closing. Meticulous attention to detail may prolong underwriting, but time spent on risk analysis typically pays off. Documenting these details in a centralized platform often affords deal teams greater credibility when discussing deals with investors.

Digitally Systematizing the Commercial Real Estate Due Diligence Checklist

Real estate due diligence checklists were once based entirely in Excel spreadsheets. This frequently presented bottlenecks for teams without a clear process for passing data along throughout the asset lifecycle. Especially for deals under tight time constraints, it also made collaborating in real time a challenge. Analysts had no choice but to request due diligence information from external third parties, like legal counsel, then manually record it in a spreadsheet. 

Deal management software like Dealpath has simplified the way teams track real estate due diligence checklists. To streamline the process, firms can create standardized real estate due diligence checklists within investment software to apply to every deal. This process is not only easily repeatable, but also enables firms to assign tasks and hold analysts accountable, while maintaining a high-level overview.

Digitizing your due diligence processes in cloud-based software is a critical step toward completing your digital transformation. As you research solutions, these are four of the critical considerations you should make.

1. Real-Time Visibility Into the Latest Updates & Progress

Prior to the advent of modern software, teams frequently worked from outdated or inaccurate information due, in part, to disparate spreadsheets. In today’s fast-paced market, it’s critical that teams remain aligned around the latest data and information. Deal management software that updates in real-time empowers teams to collaborate in lockstep, keeping the latest data and information at their fingertips.

2. Standardize Unique Due Diligence Checklists Based on the Deal Type

The goal of commercial real estate due diligence checklists is always to ensure that no minor details slip through the cracks, which might otherwise cause investors to incur unexpected expenses further down the line. Not all due diligence processes are the same, though. Depending on the property type, location, and countless other factors according to your firm’s preferred level of scrutiny, additional steps are usually necessary.

Deal management software empowers your firm to standardize unique due diligence checklists based on the deal. For example, land purchase due diligence checklists may vary between Massachusetts and Wyoming, and standardized checklists would reflect those differences. This approach makes due diligence a repeatable process, all without missing vital nuances from deal to deal.

3. Automate Deal Communications During Due Diligence

While the broader deal team may not need an update for every box in the real estate due diligence checklist, it’s important for team members to complete each step punctually and alert others as needed. Automating alerts and communications is one way to ensure that all team members stay up-to-date on high-priority deals.

Rather than requiring time-strapped team members to send emails with updates, rely on a deal management platform that automates these communications. For example, Dealpath alerts team members when key tasks are completed or when deals are ready for next steps based on custom notification criteria. This eliminates significant administrative work, freeing up team members to continue higher-priority work.

4. Track Approvals on DD Tasks

Beyond collecting an array of documents and data, analyzing these points is a critical part of the real estate due diligence checklist. If stakeholders must weigh in, throughout the process, then it’s vital to maintain a record of what they have–and have not–viewed or approved.

Tracking task approvals is a simple way to empower more efficient collaboration for deal teams. Approving mission-critical tasks directly in deal management software ensures vital considerations never slip through the cracks. At any point, team members can look to these records for confirmation on which points have been addressed.

5. Reporting on Tasks

While viewing which information has been shared and approved at the deal level is valuable, it’s also vital for management and senior leadership to keep a pulse on tasks that remain outstanding. Deal management solutions that offer configurable reporting can help stakeholders to audit current, upcoming and outstanding tasks to keep timelines on track.

Creating Visibility and Accountability

Standardizing due diligence checklists benefits firms in a number of other ways. After data is passed from the acquisition team to another team, deal management platforms ensure that all changes are tracked, and that up-to-date data is readily available to the entire organization. In many instances, third parties can also access the software to directly input information they’re accountable to obtain. If an analyst leaves for vacation in the middle of the due diligence phase, executives and teammates can simply check the task list to easily find remaining tasks. When new analysts come on board, this standardized checklist clearly articulates required tasks. 

By standardizing due diligence checklists in a deal management platform, your team can work faster, more collaboratively and efficiently, and deliver results at scale.

Take Your Real Estate Due Diligence Checklist to the Cloud

Due diligence is inevitably a collaborative process, but many teams without modernized technology struggle to piece together data and checklists across various systems. Nonetheless, like all other steps throughout the investment process, maintaining clear visibility into how deals are progressing is crucial.

Download this e-book to learn how modern deal teams grow competitive portfolios by managing due diligence in a cloud-based tool. After reading the e-book, you’ll understand why deal teams standardize processes and collaborate in lockstep.

Download Free E-Book
Matt Carrigan

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