CRE 101 Series

1. 1. What is CRE?
2. 2. The T12
3. 3. NOI Explained
4. 4. Cap Rates
5. 5. Property Types
6. 6. How Properties Make Money
7. 7. Lease Structures
8. 8. Financing Fundamentals
9. 9. Key Investment Metrics
10. 10. Valuation Basics
11. 11. Reading a Rent Roll
12. 12. Pro Forma Rent
13. 13. Risk Profiles
14. 14. Due Diligence
15. 15. The Acquisition Process

In This Article

Common Due Diligence Items in CRE: A Beginner's Guide

A signed PSA is the start of the real test. Everything assumed while underwriting the deal, the rent roll, the T12, the property's physical condition, now has to hold up against what's actually there, before the deal becomes final.

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Underwriting vs. Due Diligence

Be clear on the distinction, since the two terms get used loosely. Underwriting happens before a contract is signed, building the financial model and forming a view on value. Due diligence happens after the contract is signed, verifying that the assumptions built into that underwriting are actually true, before the deal closes.

Financial Due Diligence

Financial due diligence means verifying the numbers already covered earlier in this series actually hold up under scrutiny.

This typically includes cross-checking the rent roll against bank deposits and actual lease documents, reviewing the T12 operating statement against what was represented by the seller, and confirming vacancy assumptions, expense figures, and any one-time or non-recurring items called out in the NOI calculation. It also includes reviewing the general ledger behind the T12, since the summary numbers on a T12 are only as reliable as the underlying entries that produced them, and checking the seller's existing insurance policies, coverage limits, and any claims history, since a coverage gap or a pattern of claims can materially affect what the buyer will actually pay for insurance going forward. If something in the underwriting was based on a seller-provided number, financial due diligence is where that number gets tested against reality.

Cross-checking goes faster when both documents are in a readable, standardized layout to start with. DealDuo cleans seller-provided rent rolls and T12s into Excel and marks low-confidence items for review, so unclear entries land on your list instead of passing through unnoticed.

Physical Due Diligence

Physical due diligence means having the property's condition inspected by a qualified professional, often called a property condition assessment.

This covers the building's major systems, HVAC, electrical, plumbing, roof, structural elements, and identifies any deferred maintenance or safety issues that weren't apparent from the outside. The goal is to catch capital needs before closing, not after, since a major system failure discovered post-closing becomes the new owner's problem rather than something that could have been negotiated.

Legal Due Diligence

Legal due diligence confirms that the seller actually has clear authority to sell the property, and that there's nothing attached to the title that would create a problem for the buyer.

This typically includes a title review (checking for liens, unpaid taxes, or other claims against the property), a property survey, and confirming the property complies with current zoning. It also includes reviewing existing leases for anything unusual, undisclosed disputes, unusual tenant rights, or terms that don't match what was represented earlier in the process.

Environmental Due Diligence

Environmental due diligence typically means commissioning a Phase I Environmental Site Assessment, a standard report that checks the property's history and current condition for signs of contamination, based on historical records, a site visit, and regulatory database searches.

Most lenders require one before financing a commercial property. If a Phase I assessment turns up a potential concern, a more detailed Phase II assessment may follow to determine the actual severity and cost of any issue. This is a specialist area, and this overview only scratches the surface, but knowing it's a standard, expected part of the process is the important takeaway at this stage.

Why Due Diligence Findings Can Reshape a Deal

Finding something during due diligence isn't a sign the deal was bad from the start, it's the entire point of the process. Findings don't just feed negotiation, they also feed back into the underwriting model itself: a verified expense number, a corrected vacancy assumption, or an updated capital needs estimate should get built back into the numbers, not just noted as a talking point for the seller. Common outcomes include an updated underwriting model with more accurate assumptions, renegotiating the purchase price, requesting a credit at closing to cover a needed repair, or in less common cases, walking away from the deal entirely if something material and unresolvable turns up.

Most purchase agreements include a due diligence contingency specifically so a buyer can exit without penalty if something significant is uncovered. Treating due diligence as a real verification process, rather than a formality to get through quickly, is what that contingency period actually protects. It's also just one piece of the larger timeline from offer to closing.

Common Mistakes

• Treating due diligence as a formality rather than genuine verification. The whole value of the process comes from actually checking, not from moving through a checklist quickly to get to closing.
• Skipping or rushing the physical inspection to save time or money. A deferred maintenance issue that surfaces after closing is far more expensive than one caught and negotiated beforehand.
• Not budgeting enough time for the process. Thirty days is often not enough for a genuinely thorough review, especially if third-party reports (environmental, property condition) take time to schedule and deliver.
• Treating due diligence purely as a negotiation tool. Verified findings should feed back into the underwriting model itself, updated expense figures, corrected vacancy assumptions, revised capital needs, not just get flagged as leverage in a conversation with the seller.

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