Commercial Real Estate Due Diligence Checklist

What Due Diligence Actually Means in a CRE Transaction

Due diligence is the contractual window between executing a purchase and sale agreement and waiving your contingencies — the period where you verify that what you are buying matches what you think you are buying. It is not a formality. It is the last point in the transaction where you can walk away with your earnest money intact, renegotiate the purchase price based on what you find, or require the seller to remediate issues before closing.

In commercial real estate, DD is fundamentally different from residential. There is no standard home inspection. There is no seller disclosure form that covers everything. The burden is on the buyer to investigate every aspect of the property — physical, financial, legal, environmental, and regulatory — and the seller's obligation is typically limited to providing access and existing documentation.

Roughly 15 to 20 percent of CRE deals that reach PSA execution do not make it to closing, and the majority of those die during DD. Understanding what to investigate, in what order, and to what depth is the core competency that separates experienced acquisition teams from everyone else.

The 7 Categories of CRE Due Diligence

1. Title and Ownership

Order a title commitment from a national title company within the first 48 hours of the DD period. The commitment will reveal the current vesting, all recorded liens, mortgages, judgments, easements, and exceptions. Review the chain of title for at least the last two conveyances. Verify the seller has authority to convey — if the seller is an LLC, confirm the operating agreement authorizes the sale and identify who has signing authority.

Title insurance is not optional. Your lender will require a lender's policy, and you should always purchase an owner's policy. Extended coverage endorsements — survey, zoning, access, contiguity — cost relatively little and close real gaps in standard coverage.

2. Survey

Order an ALTA/NSPS land title survey compliant with the current 2021 Minimum Standard Detail Requirements. The survey should include Table A items relevant to your deal — at minimum items 1, 2, 3, 4, 6a, 6b, 7a, 7b1, 8, 9, 10, 11a, 13, 16, 17, 18, and 19. For development deals, add items 5 (contours), 7c (utilities), and 11b (zoning setback lines drawn on the plat).

The survey is not just a boundary map. It is your ground truth for buildable area, setback compliance, parking counts, flood zone determination, access points, and encroachment identification. Compare the survey to the title commitment — every easement and exception in Schedule B-II should be plotted on the survey.

3. Environmental

A Phase I Environmental Site Assessment per ASTM E1527-21 is the baseline for every CRE acquisition. The Phase I identifies Recognized Environmental Conditions (RECs), Controlled RECs (CRECs), and Historical RECs (HRECs). It also establishes your Bona Fide Prospective Purchaser defense under CERCLA.

If the Phase I identifies RECs, you will likely need a Phase II investigation — actual soil and groundwater sampling. Phase II costs range from $8,000 to $50,000 depending on scope. Turnaround is typically 4 to 6 weeks, which is why you need to order the Phase I immediately so any Phase II recommendation does not blow through your DD deadline.

Beyond Phase I/II, assess for asbestos-containing materials in pre-1980 buildings, underground storage tanks (check state UST registry), lead-based paint in pre-1978 structures, and wetlands on undeveloped parcels. For properties adjacent to dry cleaners, gas stations, or former industrial operations, request a vapor encroachment screening per ASTM E2600.

4. Zoning and Land Use

Verify the property's zoning designation with the local planning department — do not rely on the listing broker's representation or the county assessor's records. Obtain a zoning confirmation letter or zoning compliance certificate if the jurisdiction issues them.

If the property operates as a legal nonconforming use (grandfathered), understand the limitations — most jurisdictions restrict expansion, prohibit reconstruction after casualty loss exceeding 50 percent of value, and terminate nonconforming status after a period of discontinuance (typically 12 to 24 months).

For development deals, verify permitted density (FAR, dwelling units per acre), height limits, setbacks, parking requirements, and any overlay district requirements. Identify whether your intended use requires a conditional use permit, variance, or rezoning, and assess the timeline and political feasibility.

5. Financial and Lease Analysis

For income-producing properties, obtain trailing 3-year operating statements (preferably audited or CPA-prepared), a current rent roll, a complete set of executed leases, tenant estoppel certificates, and copies of all service contracts.

Abstract every lease. Capture base rent, escalations, percentage rent, reimbursement structure, commencement and expiration dates, renewal options, termination rights, permitted use, exclusivity, co-tenancy, go-dark rights, and assignment/subletting restrictions. Reconcile the rent roll to the leases and the operating statements to bank deposits.

Start the estoppel process on Day 1. Tenant response times are unpredictable and estoppel delays are the single most common cause of DD extensions.

6. Physical Condition

Order a Property Condition Assessment per ASTM E2018-15 from a licensed engineering firm. The PCA evaluates structural, building envelope (roof, walls, windows), mechanical (HVAC), electrical, plumbing, fire protection, life safety, and ADA compliance. It provides an opinion on remaining useful life, deferred maintenance, and recommended capital expenditures over a 12-year evaluation period.

The PCA should include a Replacement Reserve Schedule. Compare recommended reserves to your underwritten CapEx assumptions. If the PCA recommends $4.50 per square foot annually and you underwrote $2.00, your return assumptions need revision.

For value-add deals, supplement the PCA with targeted inspections — a roof consultant for flat roofs approaching end of life, an HVAC engineer for central plant systems, a structural engineer for adaptive reuse load capacity. These specialists cost $3,000 to $10,000 each and prevent six-figure surprises after closing.

7. Legal

Your attorney should review the PSA for DD period mechanics, closing conditions, representations and warranties, indemnification obligations, and default remedies. Verify that the DD period gives you adequate time and a clean termination right. Confirm the earnest money goes hard only when you affirmatively waive contingencies, not on a passive basis.

Verify the Certificate of Occupancy matches the existing use. Run a litigation search on the property address and the seller entity. Form your acquisition entity and obtain your EIN before the lender needs entity documents — typically 3 to 4 weeks before closing.

DD Timelines by Deal Complexity

Stabilized acquisitions with clean title and existing environmental reports: 30 days. Value-add acquisitions requiring detailed physical inspections, renovation scoping, and lease-level analysis: 45 to 60 days. Development and ground-up deals requiring entitlement review, geotechnical investigation, and environmental remediation scoping: 60 to 90 days.

When DD Uncovers Problems

DD findings fall into four categories. Deal killers — contamination exceeding the acquisition basis, incurable title defects, zoning that prohibits your intended use. Walk away. Repriceable issues — deferred maintenance, below-market lease terms, conditions requiring limited remediation. Quantify the cost and renegotiate. Manageable conditions — items you can address post-closing within your existing budget. Document them and adjust reserves. Lender-required remediations — issues the lender requires resolved before funding (code violations, ADA deficiencies). Negotiate seller pre-closing remediation or escrow holdback.

How DD Requirements Differ by Lender Type

Agency lenders (Fannie Mae, Freddie Mac, FHA/HUD) have standardized requirements: full third-party report package with agency reviewer approval. CMBS lenders require the same reports plus additional lease-level analysis for securitization rating agencies. Bridge and debt fund lenders are more flexible but typically still require Phase I, appraisal, and title insurance. Construction lenders require the most extensive package — everything above plus geotechnical reports, approved plans and permits, GMP contracts, payment and performance bonds, and builder's risk insurance.

Common DD Mistakes That Cost Real Money

Not ordering third-party reports on Day 1. Phase I turnaround is 3 to 4 weeks, PCA is 2 to 3 weeks, ALTA survey is 3 to 4 weeks. Not reading the actual leases — rent rolls are summaries, leases are contracts. Underestimating environmental risk on industrial and retail properties — Phase I costs $3,000 to $5,000, UST remediation costs $100,000 to $500,000. Not verifying zoning independently. Failing to review and terminate unwanted service contracts during DD.