The Industrial Real Estate Due Diligence Checklist: A Broker's Insider Guide
As veteran industrial real estate brokers in Orange County, we've seen it all - from the highs of lucrative deals to the lows of properties that didn't live up to expectations. One thing that separates the winners from the losers in this market? Thorough due diligence.
The Importance of Industrial Real Estate Due Diligence
Buying an industrial property is a major financial decision, often involving multi-million dollar investments. Conducting comprehensive due diligence is absolutely critical to uncover potential issues, mitigate risks, and ensure you're getting maximum value.
While some investors may be tempted to skip this step in the pursuit of a "good deal," we've found that taking the time to thoroughly vet a property almost always pays off in the long run. In our experience, the cost of missing a major issue during due diligence can far outweigh any upfront savings.
The Industrial Real Estate Due Diligence Checklist
So what should you be looking for when evaluating an industrial property? Here's our comprehensive due diligence checklist:
1. Physical Condition Assessment
First and foremost, you'll want to get a professional property inspection to assess the physical condition of the building, land, and infrastructure. This should include a thorough review of the roof, HVAC, electrical, plumbing, and any specialized equipment or systems.
For example, let's say you're considering a $4,000,000 industrial warehouse in Anaheim. The inspection reveals that the roof will need to be replaced within 5 years at a cost of $300,000. Knowing this upfront allows you to factor that expense into your purchase price negotiations.
2. Environmental Concerns
Next, you'll need to investigate any potential environmental issues or contamination on the property. This can include things like underground storage tanks, previous use for hazardous materials, or proximity to Superfund sites.
In our region, we've seen properties held up for months due to unexpected asbestos or lead paint remediation requirements. Getting an environmental assessment early on can help you avoid these nasty surprises.
3. Zoning and Entitlement Review
It's critical to verify that the current zoning and land use designations allow for your intended use of the property. This may include confirming permitted uses, parking requirements, building height restrictions, and more.
For example, if you're planning to use the space for a high-cube warehouse, you'll want to ensure the zoning supports that type of operation. Trying to get a zoning variance can be a lengthy and expensive process.
4. Tenant and Lease Analysis
If the property is already leased, you'll need to closely review the existing tenant profiles and lease agreements. Key items to assess include:
- Tenant credit quality and financial strength
- Remaining lease term and renewal options
- Rental rates compared to market
- Landlord responsibilities vs. tenant responsibilities
- Escalation clauses, pass-through expenses, and other financial terms
Taking the time to really understand the existing income stream and tenant dynamics can uncover potential risks or opportunities.
5. Operations and Expenses Review
Finally, you'll want to thoroughly review the property's operating history and ongoing expenses. This includes utilities, maintenance, insurance, taxes, and any other regular costs.
For a $4,000,000 industrial property, you might find that annual operating expenses average $250,000, or around $6.25 per square foot. Understanding these figures upfront is crucial for accurately projecting your net operating income and returns.
Putting it All Together
The due diligence process for industrial real estate may seem daunting, but we assure you it's time well spent. By carefully evaluating all these critical factors, you can make informed decisions, mitigate risks, and position yourself for long-term success.
At the end of the day, conducting thorough due diligence is the best way to ensure you're making a sound investment. If you have any other questions about the process, please don't hesitate to give our team a call. We're always happy to share our expertise and insights.