Commercial Property Due Diligence: The Complete Checklist for Buyers and Sellers

Why Due Diligence Matters

Commercial real estate due diligence is the investigative process buyers undertake to verify everything about a property before completing a purchase. For sellers, understanding this process helps you prepare properly and avoid deal-killing surprises.

A typical due diligence period lasts 30-90 days depending on property complexity. During this time, buyers will examine every aspect of your property. Preparation makes the difference between a smooth closing and a failed deal.

Financial Due Diligence

Buyers will scrutinize your property's financial performance thoroughly.

Income Verification

**Documents Needed:**
[ ] Current rent roll with all lease terms
[ ] All executed leases (including amendments)
[ ] Lease abstracts summarizing key terms
[ ] Historical rent collections (12-24 months)
[ ] Accounts receivable aging report
[ ] Security deposit ledger
[ ] Percentage rent calculations (if applicable)

**What Buyers Are Looking For:**
Is the rent roll accurate?
Are tenants paying on time?
What percentage of rent actually gets collected?
Are there lease expirations or issues coming?
Are rents at market or above/below?

Expense Verification

**Documents Needed:**
[ ] Operating statements (3 years minimum)
[ ] Property tax bills (3 years)
[ ] Insurance policies and payment history
[ ] Utility bills (12 months minimum)
[ ] Service contracts (landscaping, cleaning, security, etc.)
[ ] Repair and maintenance records
[ ] Property management agreements
[ ] CAM reconciliations (for NNN properties)

**What Buyers Are Looking For:**
Are the stated expenses accurate and complete?
Are any expenses abnormally low (meaning deferred spending)?
What contracts will they inherit?
Are there upcoming expense increases?
What's the realistic NOI after normalization?

Financial Analysis

**Buyer Calculations:**
Verify NOI matches representations
Calculate actual vs. pro forma returns
Assess rent bumps and escalations
Model lease rollover risk
Determine capital expenditure needs
Stress-test the investment

Physical Due Diligence

The property's physical condition directly affects value and future costs.

Building Inspection

**Documents Needed:**
[ ] As-built drawings and floor plans
[ ] Building permits and certificates of occupancy
[ ] Structural engineering reports (if available)
[ ] Previous inspection reports
[ ] Capital improvement history
[ ] Warranty information

**What's Inspected:**
Roof condition and remaining life
HVAC systems and maintenance records
Electrical systems and capacity
Plumbing systems
Structural integrity
Parking lot and exterior condition
Fire safety and life safety systems
ADA/AODA compliance

**Common Issues Found:**
Roof nearing end of life ($10-30/sq ft to replace)
HVAC systems needing replacement ($3,000-10,000/ton)
Parking lot deterioration ($3-8/sq ft to repave)
Electrical capacity limitations
Code compliance deficiencies
Deferred maintenance accumulation

Environmental Assessment

**Phase I Environmental Site Assessment:**
Reviews historical uses of the property
Identifies potential contamination sources
Examines neighboring properties
Reviews regulatory databases
Site reconnaissance and interviews

**When Phase II Is Triggered:**
Historical industrial use
Underground storage tanks
Adjacent contamination sources
Visual evidence of contamination
Regulatory records showing issues

**Seller Preparation:**
Obtain Phase I before listing if possible
Disclose known environmental issues
Have documentation of any remediation
Know the history of your property

Survey and Title

**Survey Review:**
Boundary verification
Easement identification
Encroachment discovery
Access confirmation
Zoning line verification

**Title Review:**
Ownership verification
Lien search
Encumbrance review
Easement review
Title insurance commitment

Legal Due Diligence

Legal issues can kill deals or create post-closing problems.

Lease Review

**What Lawyers Examine:**
Tenant rights and obligations
Landlord obligations
Assignment and subletting provisions
Renewal options and terms
Termination rights
Exclusive use clauses
Co-tenancy provisions
Operating covenants

**Common Issues:**
Below-market renewal options
Tenant termination rights triggered by sale
Approval requirements for ownership changes
Exclusive uses limiting future leasing
Incomplete or missing documentation

Corporate and Entity Review

**Documents Needed:**
[ ] Entity formation documents
[ ] Authorization to sell
[ ] Partnership or operating agreements
[ ] Any consents required for sale
[ ] Good standing certificates

Litigation Review

**Disclosure Requirements:**
Current litigation involving property
Threatened claims
Past settlements affecting property
Tenant disputes
Insurance claims history

Regulatory and Compliance Due Diligence

Government regulations significantly affect commercial property.

Zoning Review

**Items to Verify:**
Current zoning designation
Permitted uses under zoning
Non-conforming use status
Parking requirements
Signage restrictions
Setback and height limits
Future zoning changes proposed

**Documents Needed:**
[ ] Zoning certificate or letter
[ ] Site plan approval
[ ] Minor variance approvals
[ ] Development agreements

Building Code Compliance

**Areas of Concern:**
Fire safety compliance
Accessibility compliance (AODA in Ontario)
Elevator certifications
Fire alarm and sprinkler certifications
Structural compliance
Exit and egress compliance

**Documents Needed:**
[ ] Building permits for work done
[ ] Final inspection sign-offs
[ ] Occupancy permits
[ ] Fire department approvals
[ ] Elevator inspection certificates

Tenant Due Diligence

For multi-tenant properties, tenant quality is crucial.

Tenant Verification

**For Each Tenant:**
Verify lease is in full force
Confirm current rent and deposits
Check for outstanding disputes
Verify business is operating
Assess financial health

Estoppel Certificates

**What Estoppels Confirm:**
Lease is in effect
Current rent amount
Security deposit amount
No landlord defaults
No tenant claims
Options and rights

**Timing:**
Request estoppels early in due diligence
Allow 15-30 days for tenant response
Follow up persistently
Prepare for some non-responses

Tenant Interviews

Buyers often want to speak with tenants:
Satisfaction with property
Business performance
Renewal intentions
Any concerns or issues
Relationship with landlord

The Due Diligence Timeline

Day 1-10: Document Delivery

Seller provides due diligence materials:
Organize documents in virtual data room
Prepare summary packages
Be available for questions
Provide access for inspections

Day 10-30: Physical Inspections

Buyer conducts site work:
Building inspections
Environmental assessments
Survey updates
Tenant interviews

Day 15-45: Document Review

Buyer's team analyzes:
Financial records
Leases and contracts
Title and survey
Legal issues

Day 30-60: Issue Resolution

Address concerns discovered:
Negotiate repairs or credits
Clarify ambiguous issues
Resolve title matters
Update documents

Day 45-75: Final Confirmation

Prepare for closing:
Final estoppel collection
Tenant notification
Closing document preparation
Funding confirmation

Seller Preparation Best Practices

Before Listing

- Conduct your own due diligence review
Order Phase I environmental
Update survey if old
Collect and organize all documents
Identify and address known issues
Prepare financial summaries

During Marketing

- Have data room ready
Be responsive to requests
Disclose known issues proactively
Control property access appropriately
Keep current on financials

During Due Diligence

- Respond quickly to requests
Be transparent about issues
Propose solutions, not just problems
Maintain normal operations
Don't make major changes

Common Deal Killers

**Issues That Often Kill Deals:**
Undisclosed environmental contamination
Structural problems requiring major repair
Tenant financial issues or pending departures
Title defects that can't be cured
Zoning non-compliance without variance
Material misrepresentation in financials
Inability to obtain financing

**How to Prevent:**
Disclose known issues upfront
Have documentation ready
Address problems before listing
Price appropriately for condition
Work with experienced professionals

Get Help With Your Transaction

Whether you're buying or selling commercial property, thorough due diligence protects your investment. We guide GTA landlords through every step of the transaction process.