The Importance of Due Diligence
Buyers and sellers of commercial real estate know that due diligence is important. For various reasons, however, buyers sometimes cut corners and sellers try to rush the process.
Buyers are sometimes so emotionally invested in buying what they believe in their gut to be a great property that they don’t do the due diligence that is essential to ensure they get what they pay for.
Buyers are sometimes so emotionally invested in buying what they believe in their gut to be a great property that they don’t do the due diligence that is essential to ensure they get what they pay for.
When it comes to insurance, briefly stated, there are two types of commercial liability insurance policies. A claims-made policy provides protection for claims made during the specified policy period. In contrast, an occurrence-based policy provides protection for claims that occurred during a policy period no matter when the claim is made.
In the environmental context, occurrence policies may be stacked to provide a policyholder multiple years of coverage to pay for long-tail environmental claims.
In the environmental context, occurrence policies may be stacked to provide a policyholder multiple years of coverage to pay for long-tail environmental claims.
Whenever possible, the buyer should request and review each and every lease relating to the property. The buyer needs to identify the termination dates of the various leases and assess the risk that one or more tenants will vacate at the end of their lease term.
The buyer should also note any discrepancies, concessions, or landlord obligations to make improvements or renovations. If the seller has not met the concession or made the required renovations, the buyer will assume those obligations and the buyer must factor those costs into its own operating projections.
The buyer should also note any discrepancies, concessions, or landlord obligations to make improvements or renovations. If the seller has not met the concession or made the required renovations, the buyer will assume those obligations and the buyer must factor those costs into its own operating projections.
Outside of doing environmental due diligence and buying the right insurance coverage, the outcome of the Garcia's case could have been different had the Garcias raised the affirmative defense that application of the claims-in-process exclusion rendered the coverage illusory.
The buyer should attempt to verify all remaining expense items. By learning as much as possible about how the seller operates the property, the buyer can better analyze how its own operation of the property might differ and how that might result in higher or lower expenses. For example, some sellers are hands-on owners, and the maintenance expense may reflect only the cost of materials, since they do not pay themselves labor costs.
The buyer should attempt to verify all remaining expense items. By learning as much as possible about how the seller operates the property, the buyer can better analyze how its own operation of the property might differ and how that might result in higher or lower expenses. For example, some sellers are hands-on owners, and the maintenance expense may reflect only the cost of materials, since they do not pay themselves labor costs.