Commercial Property Investment Brisbane - The importance of Due Diligence
It has always surprised me how many property investors gloss over the due diligence process. There seems to be a misconception that as long as you have the leases checked by a lawyer that you’re effectively bulletproof but this simply isn’t the case. There are a myriad of factors that need to be considered, and oftentimes a lease will provide only a small amount of safety net if things don’t go to plan.
To save yourself potentially major headaches or a whole lot worse, if you are considering commercial property investment in Brisbane, do not under play the importance of due diligence!
1.0 What is Due Diligence?
When assessing a commercial property, investors will undertake initial general due diligence prior to making an offer. This is usually done with readily available information provided by the agent such as leases, tenancy schedules, outgoings information and other information such as town planning assessments. Such information along with assessment of the market can provide a basis for assessing market value and therefore a price to offer.
A key difference between residential sales contracts and commercial contracts is that aside from making the contract subject to finance and building and pest, it is common place to also make the contract subject to due diligence. This effectively allows a buyer to secure a property under contract subject to their own investigation into the property (“due diligence”) as well as the right to terminate the contract for any reason whatsoever.
This is extremely valuable for a buyer as you are given an opportunity to properly scrutinse the property and assess whether you should proceed with the purchase, or not.
2.0 Key parts of due diligence in commercial property investment brisbane
The due diligence process of course comprises the standard elements of building inspections and a review of leases but there are many further things that should be investigated. Ordinarily, whatever information is required, can be requested from the seller. If there’s hesitation or refusal to provide any information then this could be a sure sign of something being amiss.
It’s important to know the right questions, and what to look for.
As part of the due diligence process for our clients, we look at many factors including:
Lease review – Commercial property leases are complicated documents and to make it more difficult, each one is quite different to another. Unlike residential leases which a standardised, commercial agreements can be negotiated on an almost infinite number of points. For this reason, a full understanding of the mechanics of commercial leases is required to properly review a lease agreement.
Outgoings review including analysis of provided expenditure against benchmarks, previous years actuals and reconciliations, tenancy statements and evidence of what is paid by tenants. With regard to recoverable outgoings from tenants, without an understanding of how outgoings are paid and on-charged, it is easy to be misled. With some peeling back of the layers oftentimes you will find that things aren’t always as they have been presented for the purposes of sale.
Tenant payments – We review tenant ledgers and history, investigate whether there have been any major defaults and if so what happened. Without looking back, there is absolutely no clarity around whether a tenant is paying well and as obligated.
Plant and equipment – unless properly managed during lease tenure, equipment such as air conditioning can be severely neglected and therefore it is important to get an understanding of how plant and equipment have been maintained to date and who has been responsible for it.
Body Corporate Reviews – If buying strata titled commercial properties, these arrangements can often be complex particularly if there are multiple body corporates eg. retail and residential. We not only recommend reviewing strata title disclosures but talking with managers and those on the committee to gather whether there are any issues. The fact is that there often are and they aren’t immediately apparent from basic disclosures and statements provided.
3.0 Examples where things go wrong without sufficient (or any) due diligence
Over many years working in commercial property investment brisbane we’ve seen and heard of many instances where buyers have failed to undertake proper due diligence. Some examples of these include:
- Buyer of mixed use retail, commercial and residential property failed to look past the leases when conducting due diligence. They asked the selling agents if there were any issues with the tenants to which the agent informed them that there were no issues. Once the property settled it was immediately apparent that the tenant had been in a major ongoing dispute with the previous landlord, had not paid rent in a long time and was refusing to pay rent going forward. It may seem naive that a buyer would take the word of a selling agent like in this case but this is very common.
- A buyer of a leased retail strata titled investment bought the property before discovering that a large area which forms part of the lot is utilised as common area by several other retail lots, however must be maintained at the cost of the lot they had purchased.
- A buyer of a multi tenanted retail investment found that a sizeable tenant appeared unable to pay the majority of their rent within the first months of their ownership. It became apparent that the tenant had received an incentive from the previous owner which was not made clear at purchase so that they had effectively not paid rent for some 12-18 months prior to the sale.
Due diligence is a valuable tool for commercial property buyers and given that you have a get out clause based on anything you may find – it really is something that you should do properly to ensure the security of your investment.
Without a working knowledge of the commercial property space, this process can be tricky and it can be difficult to know what to look out for.
We operate within the commercial property framework daily and as a result we are armed to undertake efficient due diligence. If you are considering commercial property investment Brisbane and need help navigating the lay of the land please consider our commercial property buyers agent Brisbane & South East Queensland services (READ MORE HERE). We would love to help.