Contributed By Allen Matkins Leck Gamble Mallory & Natsis LLP
Buyers want to validate the income-generating potential of the property and the rents being paid, so will review all leases for anything that could affect that income stream, such as termination rights, free rent periods, abatement conditions, etc. They also look for anything that would limit their ability to eventually re-sell the property. Buyers will also want to review any environmental issues, entitlements and easements, and any zoning changes that might affect how the property can be modified, rebuilt or redeveloped. Additionally, the buyer will want to know if the property is in a district subject to additional taxes for neighborhood improvements, and will want to search for any liens against the property. In sum, they want to ensure the title is free and clear.
Depending on the sophistication and capacity of the client, buyers often rely on their lawyers to conduct much of this diligence. Some experienced clients handle their own lease review, generally limiting lawyer review to key non-economic risk issues relating to the leases. Oftentimes, lawyers perform a detailed review of the largest leases, and the buyer reviews the rest.
Due diligence regarding the physical condition of the building and other inspections are handled by consultants or engineers, typically hired by the buyer, though sometimes hired by the law firm. Lawyers may become involved, depending on the nature of the entitlement and environmental conditions affecting the site.