At the end of 2023, the construction of the professional soccer team Indy Eleven’s $1.5 billion stadium in downtown Indianapolis came to an abrupt halt. The reason: human remains were discovered at the construction site.
Developers unearthed more than 80 burial shafts, forcing them to pause work for further examination and submit a reinterment plan. More than half a year later, construction remains at a standstill.
While the city contemplates a new stadium site, this unexpected discovery highlights the importance of due diligence—and what can happen when it’s overlooked. Below, we explain what due diligence is in commercial real estate and why it’s a necessary step in any transaction.
In commercial real estate, due diligence refers to the process of investigating a property before finalizing a real estate deal as well as assessing the businesses and individuals involved in the transaction. It’s a crucial step to help buyers and investors identify hidden factors that can make the difference between an excellent deal and an expensive mistake.
The process usually happens in the later stages of a transaction and includes everything from physical inspections to running background checks on the involved parties to reviewing financial documents, tenant leases, legal compliance, and environmental reports. The goal is to confirm the property's value and identify any hidden liabilities, whether that’s in the property itself or the company or individual on the other side of the deal.
No matter whether you’re buying, developing, selling, or lending a property, due diligence ensures that a deal aligns with your risk tolerance and financial goals. It can also mitigate or prevent unexpected complications, as in the case of the Indy Eleven stadium construction.
Making due diligence even more critical these days is the fact that the real estate industry is prone to fraud and deceptive practices. Since the 2010s, commercial mortgage fraud has risen alarmingly. In fact, according to a 2024 report by the Financial Accountability and Corporate Transparency (FACT) Coalition, $2.6 billion in suspicious funds were invested in U.S. commercial real estate over the past two decades.
To that end, thorough due diligence not only protects your investment but also helps ensure you make informed decisions in an increasingly complex and fraud-prone market.
Comprehensive due diligence encompasses a variety of areas, looking at different aspects like a property’s financial history, physical condition, legal considerations, and more. For convenience, you can categorize due diligence into six types:
The typical due diligence period lasts between 30 and 90 days, although it can extend up to six months depending on the complexity of the deal. Factors like the property’s size, physical inspection needs, legal reviews, and environmental assessments naturally influence the timeline.
Larger properties, such as multi-tenant buildings or industrial facilities, often require more extensive reviews—meaning longer processes. Complex title or zoning issues, along with environmental site assessments (especially if contamination is discovered), may also extend the timeframe.
In some cases, state laws or zoning regulations also affect the duration of the due diligence period. For example, strict state laws or zoning conflicts can lengthen the process, while more lax regulations can speed things up.
The due diligence process can start either before or after signing the purchase contract. If initiated before, an early access agreement is typically required. Buyers often negotiate the right to terminate the contract during the due diligence period if the property doesn't meet their expectations.
To avoid any unexpected issues with a property, it's best practice to complete due diligence before signing any contract. Using a due diligence checklist can help guide you in identifying any red flags that could affect the viability of the deal, and ensure you've covered all necessary steps.
Our checklist below includes the key documents and records necessary for comprehensive due diligence on a prospective commercial real estate deal. Since your due diligence checklist items will naturally vary based on the type of property involved and your goals, you should modify it accordingly. For example, a property that was previously used as a dry cleaner will likely need more in-depth environmental checks than a property that was vacant.
The due diligence process is a complex undertaking. Here's a general overview of how it might unfold:
By uncovering potential risks and bad actors, due diligence helps you judge whether you should proceed, renegotiate terms, or even back out altogether from a deal. Done thoroughly, this crucial process ensures that a property aligns with your investment goals and has no hidden red flags.
Depending on the property, various surveys and inspections may be required, so it's essential to put together a team of trusted experts and take all necessary precautions, emphasizing the importance of a due diligence background check.
At Business Screen, we offer a wide range of due diligence services tailored specifically for commercial real estate transactions. Contact us to learn how our accurate and comprehensive background checks can help enhance your commercial real estate transactions.
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