The Importance of Due Diligence When Buying Commercial Property

FIRSTLY, LET’S DEFINE what Due Diligence really means. And then, you need to understand when you should actually consider an in-depth Due Diligence study.

You see, it’s not appropriate (nor often cost-effective) for you to undertake a Due Diligence study on every property.

Generally, my advice to clients is that it’s not until you purchase a stand-alone property (or something over $1m) … should you be spending any money on a detailed Due Diligence report.

And hopefully the reason for that will soon become clear.

My Definition of Due Diligence

It involves the systematic review and analysis of the property you are about to purchase … to confirm the physical and financial aspects accord with what has been represented by the selling agent.

Now for the purpose of this article, we’ll leave aside the legal aspects of any Due Diligence – because your lawyer (as a matter of course) will check through all the lease documentation and the contract itself.

However, you will need to check that the financial details represented to you at the outset … match up with those specified within the final document.

And so, moving on to the building itself, there are 3 main areas that a Due Diligent study will cover. These include: Architectural & Structural; Mechanical & Electrical; and Hydraulics & Fire protection.

However, each of these involve analysis of different components within the building itself.

Architectural & Structural issues

Your building consultants will assess the building facade; various walls – both glass curtain walls and masonry perimeter walls; the roof and its guttering; along with any ramps and stairs leading to the building.

They will also look at the driveways; car parking and any retaining walls on the boundary of the property as well.

Your building consultants will also review at the public areas including:

  • entry lobbies
  • internal walls
  • floors & floor finishes (being carpets, tiling etc)
  • the ceilings
  • the internal stairways, plus
  • the various amenities and kitchenettes located within the building.

Mechanical & Electrical aspects.

They would start by fully-describing all of the existing systems; and then commenting on the condition of the existing plant and electrical services things like … the lift, switchboard and various other Components.

Then, their report will assess how well it all complies with BCA and Australian standards. And also comment on any corrective measures needing to be undertaken, in order to rectify any non-compliance.

Hydraulics & Fire protection.

Your consultants begin by describing existing systems relating to the hot and cold water, sewerage, storm-water and existing fire protection services.

Once again, there is an assessment made as to whether the systems comply with current regulations; and what needs to be rectified, if they don’t.

Finally, they usually make some broad calculations as to each of these systems’ capacity to cope with the property’s needs going forward.

The Necessary Information

As you can appreciate, your consultants will require fair amount of information in order to conduct a meaningful Due diligence study – and thereby, provide you with a report upon which you can rely.

And this would include things like …

  • Architectural plans and elevations;
  • Services documentation including specifications;
  • Detailed as-installed drawings – showing each component of the building;
  • The operating and maintenance manuals for the various services;
  • All the contracts in place to maintain those services; and
  • The original Building Certification from the responsible authorities.

So, when is Due Diligence appropriate?

Perhaps now you can see why it’s not always practical to undertake comprehensive Due Diligence study – when buying a Strata-titled property for under $1 million, which forms part of a much larger building.

Unless the building is relatively new, you will most likely not be able to get your hands on much of this base building information.

Besides, as there would have already been a number of other within the building … it’s reasonable to assume that any of the potential teething problems will have already been resolved.

However, if you are purchasing a stand-alone property … you generally find that the original plans, drawings, service contracts and specifications are passed from one owner to the next. And therefore, most of the required base building information should be readily available.

The consultants I recommend clients use will generally come back to me within 48 hours of inspecting the property … with a 2 to 3 page preliminary email.

And this gives you a very clear understanding of whether the property matches up to your expectations – based on what you have been told leading up to the purchase.

Bottom Line: The arrangement I have is that, if there are any items needing rectification … the consultants will provide a budget estimate of the amount to carry out the remedial work.

And that means you can quickly provide the vendors with the option of rectifying any problems themselves … or simply making a cash adjustment at settlement, for you to undertake the work yourself.

And in many respects, that’s the preferred outcome – because you then know the work is done properly.

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