Raking Through the Facts: The Essentials of Due Diligence
Before capital is deployed and a deal is finalized, investors move through several key stages of acquisition, including the due diligence period, financing contingency, and closing. Of these, due diligence serves as the cornerstone of a sound investment. This process goes far beyond verifying a property’s physical condition; it is about validating the assumptions that drive underwriting and ensuring the investment plan holds true. In today’s competitive industrial market, where speed and certainty often define success, disciplined due diligence remains the strongest safeguard against unseen risk and a foundation for long-term value creation.
Financial Due Diligence
Every acquisition begins with financial underwriting, the process of analyzing a property’s income, expenses, and potential returns. During due diligence, investors confirm that the data used in underwriting reflects the property’s true performance.
A rent roll provides an initial snapshot of tenancy, lease terms, occupancy, and reimbursements. However, reviewing the actual lease documents offers the full picture. These could reveal extension options that hold tenants at below-market rents, tenant improvement (TI) structures that artificially inflate rental rates, escalation clauses that may unlock additional income, along with other key considerations. Even small variations in lease terms can significantly alter return projections, making detailed review essential.
Operating statements help verify actual collections and expense patterns. A property may appear strong on paper, but if collection rates are low, cash flow could tell a different story. Reviewing collections reports or aged receivables can confirm tenant reliability. Expense verification, including property taxes, service contracts, and insurance, is equally important. Discrepancies in reimbursement recoveries or unaccounted-for costs can quickly erode NOI. By reconciling these figures, investors can both validate projections and identify opportunities to enhance performance through active management.
Physical Due Diligence
Physical due diligence focuses on the property’s tangible condition and functionality. A Property Condition Assessment (PCA) evaluates major building systems, structural integrity, roof and paving condition, and deferred maintenance. Even relatively new industrial assets can contain long-term issues or design inefficiencies that affect value or operating costs.
An Environmental Site Assessment (ESA) is equally vital. A Phase I ESA reviews the property’s current and historical uses, regulatory records, and adjacent uses to identify potential environmental concerns. If red flags arise, a Phase II ESA involves direct testing such as soil or groundwater sampling to determine whether contamination exists and to what extent. These steps help protect against unforeseen liability and preserve financing eligibility.
Investors should also conduct a site inspection to verify operational details such as clear heights, loading dock configurations, and parking circulation, which are particularly relevant for industrial properties. These characteristics can influence tenant retention and re-leasing potential, both critical considerations for any asset.
Other Key Considerations
Beyond the property itself, several confirmatory steps finalize the diligence process. Estoppel certificates verify that tenants agree on lease terms and payment status, eliminating discrepancies between landlord and tenant records. A review of title, survey, and easements ensures the property’s access, boundaries, and rights are clear and unrestricted.
Finally, the findings of due diligence must be translated into decisions. With a verified picture of performance and condition, investors may refine underwriting, negotiate credits, or allocate reserves for future maintenance. The goal is not simply to confirm assumptions but to use the insight gained through due diligence to strengthen the investment’s long-term outlook.
A well-executed diligence process not only uncovers risks but also reveals opportunity. By approaching each acquisition with a structured, data-driven review, investors position themselves to act with confidence, negotiate from strength, and preserve value over the long term. In a market where speed often dominates, taking the time to look through the facts remains one of the most reliable ways to ensure lasting success.