Due diligence is an expected part of every commercial real estate investment. Investors need to be absolutely sure of what they are doing before they move forward on a deal. That’s what due diligence is all about. And when an investor plans to approach a hard money lender for funding, due diligence has another role: demonstrating to the lender that their participation is both safe and warranted.
Actium Lending is a hard money and bridge lender active in Utah, Idaho, and Colorado. They expect due diligence from their clients. As long as investors do what is expected of them, Actium can usually find a way to meet their financial needs.
So what do hard money lenders expect? Here is an essential checklist for commercial property due diligence among investors hoping to obtain hard money loans:
1. Title and Ownership
Investors should obtain and review a current title report on the target property. The goal is to confirm legal ownership and uncover any previously unknown liens, encumbrances, or clouds. Ideally, the property should be clean.
Investors are obviously expected to run a title search. It is not a bad idea to purchase title insurance for a little extra protection until the deal closes.
2. Property Inspection and Condition
Hard money lending is asset-based. That means the lender is going to base its approval decision primarily on the condition and value of the property being acquired. It does little good to approach a hard money lender without knowing the physical condition of the property. Therefore, a preliminary property inspection is in order.
The investor should:
- Conduct a thorough physical inspection that looks at structural, mechanical, and cosmetic components. The roof, plumbing, and electrical systems should be a priority.
- Order a property condition report (PCR) and the most recent appraisal report. The investor might have to conduct a new appraisal if it has been a while since the last one.
- Complete a Phase I Environmental Site Assessment at a bare minimum. A Phase II assessment might be necessary for some properties.
All the data compiled from these three actions can then be presented with a loan application as proof that the property is worth investing in. Investors should understand that the lender might conduct its own appraisal and/or physical inspection.
3. Verify Compliance
Verifying regulatory and legal compliance is another big part of due diligence. For example, the investor should confirm that the property complies with local zoning. He should take a look at existing certificates of occupancy and any past records of code violations.
Use restrictions, encroachments, and easements can all affect both property value and use. The investor should be aware of such things before applying for a hard money loan.
4. Tenancy and Leases
A buy-and-hold property with rental potential should come with existing lease agreements and amendments. It is in the investor’s best interests to look into all lease and tenancy conditions thoroughly. The investor needs to know about everything from rental rates to lease expirations to escalation clauses. Tenant profiles and credit ratings are also good to know.
These are the four major items on the commercial property checklist. But there are a few more items lower down on the priority list:
- Property boundary surveys
- Seller and entity documentation
- Market comparisons
- Insurance and risk management
An investor completes his due diligence by forming a reasonable exit strategy. Presenting all the information with the loan application allows the lender to quickly reach an approval decision before moving forward with underwriting and funding. Here’s the bottom line: proper due diligence leads to positive outcomes.
