Commercial real estate due diligence is the structured investigation period between signing a purchase agreement and closing on an acquisition. During this window (typically 30 to 60 days), buyers verify every financial, physical, legal, and environmental claim about a property before committing capital. Skipping steps or rushing the process is the fastest way to inherit someone else's problem. This checklist covers every category you need to review, the reports you should order, the red flags to watch for, and how to manage the timeline so nothing falls through the cracks.
Need Financing for This Project?
Stop searching bank by bank. Get matched with 6,000+ vetted lenders competing for your deal.
Why Does Commercial Real Estate Due Diligence Matter So Much?
Due diligence is your last line of defense before wiring millions of dollars to a seller. Unlike residential transactions, commercial deals involve layered risks: multi-tenant lease structures, environmental liabilities, complex zoning overlays, and deferred maintenance that can consume years of projected returns. According to industry data, roughly 15 to 20 percent of commercial acquisitions are terminated during the due diligence period because buyers uncover issues that either kill the deal or require significant renegotiation.
The cost of skipping due diligence far exceeds the cost of performing it. A $15,000 to $50,000 investment in third-party reports and professional reviews can prevent six-figure or seven-figure surprises after closing. Once you waive contingencies and fund the transaction, your leverage disappears.
For buyers financing an acquisition through a commercial acquisition loan, lenders will require many of these reports as conditions of funding. Understanding what is needed upfront saves time and avoids last-minute scrambles that can delay closing.
What Third-Party Reports Should You Order First?
The moment your purchase agreement is executed, the clock starts. Third-party reports take the longest to complete, so ordering them immediately is critical. The three essential reports are the appraisal, the Phase I Environmental Site Assessment, and the Property Condition Assessment. Beyond those, you will likely need an ALTA survey, title search, and potentially a seismic or flood risk study depending on the property location.
Coordinate with your lender early. If you are using a bridge loan for a value-add acquisition, the lender may accept a desktop appraisal initially and require a full appraisal before refinancing into permanent debt. Understanding these requirements prevents duplicate costs.
How Should You Structure the Due Diligence Timeline?
A well-organized timeline is the difference between a smooth closing and a chaotic one. Most commercial purchase agreements provide 30 to 60 days for due diligence, but complex properties (portfolios, ground leases, properties with environmental history) may require 90 days or more. Map every task to a specific week and assign responsibility to a team member or vendor.
Start the most time-consuming items on day one. Phase I ESAs, ALTA surveys, and appraisals each take three to four weeks. If you wait until week two to order them, you will be scrambling at the end of the contingency period with incomplete information.
Build in a buffer. If your purchase agreement allows 45 days, plan to have all critical findings by day 35. This gives you 10 days to negotiate with the seller before you must either waive contingencies or walk away.
What Financial Documents Should You Analyze?
Financial due diligence is where most deals are won or lost. The seller's marketing package will paint a rosy picture, but the actual operating data tells the real story. You need to verify every income and expense line item independently.
Request at least three years of operating statements and tax returns to identify trends. A single year of data can be manipulated, but a three-year pattern is much harder to fabricate. Compare the seller's trailing 12-month statement against actual bank deposits and tax filings.
Pay close attention to expense categories that sellers commonly understate: management fees, capital reserves, insurance, and property taxes. A property showing artificially low expenses will produce an inflated NOI, which means you would be overpaying based on an inaccurate cap rate.
Use the commercial mortgage calculator to stress-test different NOI scenarios against your proposed loan terms. What happens if expenses increase by 10 percent? What if two major tenants vacate at lease expiration?
Which Financial Metrics Should You Verify?
Raw numbers are meaningless without context. You need to benchmark every metric against market standards and your own underwriting assumptions. Here are the key metrics to verify during due diligence and the thresholds that should trigger deeper investigation.
The most common financial surprise during due diligence is an NOI shortfall. Sellers frequently present a "pro forma" NOI that assumes full occupancy and market rents, when the actual in-place NOI may be 8 to 15 percent lower. Always underwrite to actual numbers, not projections.
Lease rollover risk is another critical factor that many buyers overlook. If 40 percent or more of the property's rental income expires within 12 months, you face significant re-leasing risk. Review our guide on how to model lease rollover risk in a small portfolio for a detailed framework.
How Do You Conduct a Thorough Lease Review?
For multi-tenant properties, the leases are the asset. Every lease must be read in full, not just summarized from the rent roll. Key items to verify include base rent and escalation schedules, renewal options and termination clauses, tenant improvement allowances, exclusive use provisions, co-tenancy clauses, and CAM reconciliation methods.
Request estoppel certificates from every tenant. This is non-negotiable. An estoppel is a signed statement from the tenant confirming the lease terms, rent amount, security deposit, any prepaid rent, and whether the landlord is in default. Without estoppels, a tenant could claim post-closing that the prior owner promised a rent reduction or other concession.
For properties with anchor tenants, review the tenant's financial statements or credit rating. An anchor lease is only as valuable as the tenant's ability to pay. If a national retailer has been closing locations in your market, that "guaranteed" rental income may be at risk.
What Should the Physical Inspection Cover?
The Property Condition Assessment (PCA) is your roadmap for capital expenditures over the next 5 to 10 years. A qualified engineer will inspect every major building system and provide a replacement reserve schedule. However, the PCA alone is not enough. You should also conduct your own walk-through with a contractor to get independent repair estimates.
Focus on the "big five" systems: roof, HVAC, plumbing, electrical, and structural components. Roof replacements on commercial properties range from $5 to $12 per square foot. An HVAC system at end of life can cost $15,000 to $50,000 per unit to replace. These are not cosmetic issues; they are capital expenses that directly impact your return.
ADA compliance is frequently overlooked during physical inspections. Non-compliant properties face litigation risk from serial ADA plaintiffs, and retrofit costs can be substantial. Ensure your PCA includes an ADA assessment, especially for retail and office properties.
How Do You Evaluate Environmental Risk?
Environmental contamination is one of the few due diligence findings that can create liability exceeding the property's value. Under CERCLA (the federal Superfund law), property owners can be held liable for cleanup costs regardless of whether they caused the contamination. The Phase I ESA is your primary defense, establishing the "innocent landowner" protection.
A Phase I ESA involves historical research, regulatory database searches, site reconnaissance, and interviews with current and past owners. If the Phase I identifies "recognized environmental conditions" (RECs), a Phase II assessment with soil and groundwater sampling may be required. Phase II costs range from $5,000 to $30,000 depending on the scope.
Properties with prior industrial use, gas stations, dry cleaners, or auto repair shops on or adjacent to the site carry elevated environmental risk. Even agricultural properties can have contamination from pesticides or underground fuel storage tanks.
Do not cut corners on environmental review. Lenders require a clean Phase I for financing, and the cost of remediation discovered after closing falls entirely on the buyer.
What Title and Survey Issues Should You Watch For?
Title and survey review is where legal risks surface. The title commitment will reveal liens, encumbrances, easements, and restrictions that affect the property. The ALTA survey maps the physical boundaries, improvements, easements, and any encroachments.
Common title issues include:
- Outstanding mechanic's liens from prior construction work
- Tax liens from unpaid property taxes
- Judgment liens against the seller
- Easements that restrict development or use
- Deed restrictions that limit property type or density
- Gaps in the chain of title requiring quiet title action
Work with your title company to clear any objectionable items before closing. Some issues (like utility easements) are standard and acceptable. Others (like a boundary dispute or undisclosed lien) may require seller action or a price adjustment.
The ALTA survey should be compared against the title commitment to confirm that all easements shown on the survey match those disclosed in the title report. Discrepancies between the two documents require investigation.
What Market Analysis Should You Perform?
Due diligence is not just about the property itself; it is about the market the property operates in. Your market analysis should answer three questions: Are current rents at, above, or below market? Is the market supply/demand balance favorable? What economic trends could impact the property over your hold period?
Review comparable sales within a one-to-three mile radius to validate the purchase price per square foot and cap rate. Review comparable lease transactions to confirm that in-place rents are achievable at renewal. Check the local construction pipeline for new competitive supply that could pressure rents or occupancy.
For a deeper understanding of how LTV benchmarks vary across property types, review current market data before finalizing your offer price.
What Are the Most Common Due Diligence Deal-Breakers?
Not every issue uncovered during due diligence is a deal-breaker, but some findings should make you walk away. Environmental contamination requiring remediation above $100,000, structural defects that compromise building safety, title defects that cannot be cleared before closing, and NOI shortfalls exceeding 15 percent of the seller's representation are all legitimate reasons to terminate.
Less obvious deal-breakers include zoning non-conformance (the property's current use is not permitted under current zoning), uninsurable conditions (the property cannot obtain adequate insurance coverage), and tenant concentration risk (a single tenant represents more than 50 percent of revenue and is financially distressed).
The key is having a systematic process for evaluating and resolving issues rather than reacting emotionally to every finding. Some problems have straightforward solutions: a seller credit for deferred maintenance, an escrow holdback for a pending environmental test, or a price reduction to account for below-market leases.
How Do You Handle Red Flags During Negotiations?
When due diligence uncovers issues, you need a structured approach to negotiate with the seller. Emotional reactions or ultimatums rarely produce good outcomes. Instead, follow a methodical process.
Document every finding with supporting evidence from your inspections and reports. Quantify the cost impact with contractor bids or specialist estimates. Then present the seller with a clear, specific request: a dollar amount credit, a price reduction, a repair commitment, or an escrow holdback.
For SBA loan transactions, be aware that certain due diligence findings may trigger additional lender requirements. SBA lenders are particularly sensitive to environmental issues and deferred maintenance, and may require remediation or repairs before closing.
Remember that your leverage is strongest during the contingency period. Once you waive contingencies, the seller has little incentive to negotiate. Use your due diligence timeline strategically.
Contact our acquisition team to discuss how due diligence findings may affect your loan structure or terms.
What Insurance Considerations Apply During Due Diligence?
Insurance due diligence is often treated as an afterthought, but it can reveal significant risks. Request the property's loss history (CLUE report) to identify prior claims for water damage, fire, liability, or natural disasters. Properties with extensive claims history may face higher premiums or coverage exclusions.
Verify the property's flood zone designation using FEMA maps. Properties in Special Flood Hazard Areas require flood insurance, which can cost $5,000 to $25,000 annually depending on the property size and zone classification. This cost directly impacts NOI and should be factored into your underwriting.
Obtain replacement cost estimates for insurance purposes. The insured value should reflect the cost to rebuild, not the purchase price. Underinsuring a commercial property exposes you to coinsurance penalties if a loss occurs.
Check whether the property requires specialized coverage: earthquake insurance in seismic zones, windstorm coverage in coastal areas, or pollution liability for properties with environmental history.
How Should You Organize Your Due Diligence Findings?
Organization is everything when managing a complex due diligence process. Create a centralized document repository (virtual data room) organized by category. Track every item on a master checklist with status updates, responsible parties, and deadlines.
Hold weekly status calls with your team (attorney, CPA, broker, lender, and any consultants) to review progress and escalate issues. Document all communications with the seller in writing. Verbal agreements made during due diligence are difficult to enforce after closing.
Prepare a due diligence summary memo for your investment committee or partners that highlights key findings, risks, and recommended actions. This document becomes part of your permanent file and protects you if disputes arise later.
Schedule a consultation with Clearhouse Lending to align your due diligence timeline with your financing requirements and ensure a smooth path to closing.
Frequently Asked Questions
How long does commercial real estate due diligence typically take?
Most commercial acquisitions allow 30 to 60 days for due diligence, though complex transactions (portfolios, ground-up development, properties with environmental history) may require 90 days or more. The key is ordering third-party reports immediately upon executing the purchase agreement, since appraisals, Phase I ESAs, and ALTA surveys each take three to four weeks to complete. Build a buffer of at least 10 days between when you expect final reports and when contingencies expire.
How much does commercial real estate due diligence cost?
Budget $15,000 to $50,000 for a standard acquisition, depending on property size and complexity. This includes the appraisal ($3,500 to $7,500), Phase I ESA ($2,000 to $4,000), Property Condition Assessment ($2,500 to $6,000), ALTA survey ($3,000 to $8,000), title search ($1,500 to $5,000), and legal fees. If a Phase II environmental assessment is triggered, add $5,000 to $30,000. These costs are borne by the buyer and are non-refundable if the deal falls through.
What happens if due diligence reveals a major problem?
If you discover a significant issue during the contingency period, you have several options. You can negotiate a price reduction or seller credit to account for the cost of remediation or repair. You can request an escrow holdback where funds are held until the seller resolves the issue. You can ask the seller to complete repairs before closing. Or you can terminate the purchase agreement and recover your earnest money deposit. The specific remedies available depend on the language in your purchase agreement.
Can you extend the due diligence period?
Yes, in most cases you can request an extension, but the seller must agree. Extensions are more likely to be granted if you can demonstrate a legitimate reason (delayed third-party report, weather preventing inspection) and if you are willing to increase your earnest money deposit. Some purchase agreements include automatic extension provisions tied to specific milestones. Always negotiate extension rights into your initial purchase agreement.
What is the difference between Phase I and Phase II environmental assessments?
A Phase I ESA is a records-based investigation that reviews historical land use, regulatory databases, aerial photographs, and includes a site visit and interviews. It does not involve physical testing. Its purpose is to identify "recognized environmental conditions" (RECs) that suggest potential contamination. A Phase II ESA is triggered when the Phase I identifies RECs, and it involves actual soil sampling, groundwater testing, and possibly indoor air quality analysis to determine whether contamination exists and to what extent. Phase I costs $2,000 to $4,000 while Phase II ranges from $5,000 to $30,000.