4 Reasons The Due Diligence Process Is Crucial Before You Buy Commercial Real Estate

Posted by Anne Sheehan on Feb 16, 2017

Are you planning to buy commercial real estate? If so, are you prepared to mitigate the risks of property tax increases in the future? Due diligence is your secret weapon for developing accurate financial plans for the property once you take ownership of it.

By identifying and evaluating the risks and opportunities, you’ll be Find out why the due diligence process is beneficial before buying commercial real estate.ready for the financial impact of ownership. One factor to anticipate is the property taxes you will pay after acquisition, since they are the biggest cost associated with owning and occupying a commercial building.

While many inexperienced buyers skip due diligence, the most knowledgeable buyers know its benefits. Explore these four reasons to go through the due diligence process before you invest in your next commercial property.

1. Predict Your Property Taxes

Every jurisdiction has a unique process for determining market value for property taxes. To keep up with all of these methods, you would need a professional background in real estate. Due to the variety and inconsistency of how properties are assessed across jurisdictions, due diligence is essential for predicting your future property tax costs. Skilled property tax experts are able to project what your taxes might be in the year after your acquisition.

This aspect of due diligence is especially helpful for commercial properties that may be under construction at time of purchase, but will have added value and higher property taxes upon completion. A due diligence process like this maps out your property taxes each year, estimating liability correctly and budgeting for the future.

2. Mitigate Risk

Because property taxes are the largest percentage of occupancy costs for owners, the possibility of a property tax increase needs to be factored into your financial plans. Without due diligence, you could be surprised by burdensome increases in your tax assessment from one year to the next.

A due diligence study projects what you’ll likely owe in taxes and when they’ll be due. This helps you manage and anticipate any surprises related to your tax assessments. Property tax experts have the skills and experience to look for these and other potential financial risks when conducting due diligence.

3. Verify The Property’s Actual Value

Due diligence involves a thorough, comprehensive assessment and evaluation of all aspects of a property prior to committing to a purchase agreement. It’s often conducted 45 to 60 days prior to purchasing a property, and includes title and environmental reports along with financial modeling. During that time, your team of property tax experts examines every element that affects the potential property tax assessment. If any issues might have an impact on the assessment after you acquire the property, your consultant will identify them.

For example, if you’re budgeting $150,000 for future taxes, but in reality they’re going to be closer to $500,000, the viability of your deal is challenged. These are the kinds of issues that could have a major impact on your bottom line.

4. Prepare For Future Appeals

Many initial commercial property tax assessments aren’t accurate. In some jurisdictions, the property tax assessment simply reflects a property’s transaction sale price, which may include intangibles such as workforce value, brand or personal property.

If your property’s taxes are too high, you should be prepared to file a property tax appeal. The information gathered and appraisals conducted by experts during the due diligence process are applicable to future appeals. Your property tax experts are also equipped to help you conduct a successful appeal, should that be necessary, and secure savings on your property taxes.

Property tax experts have the skills and experience to perform thorough due diligence studies. Though many companies make the mistake of performing due diligence on their own, you could have a team of experts behind you, working on your behalf to mitigate property tax risk. When you trust the experts with your due diligence, you’re on track to secure future commercial property tax savings.

Want to learn more about the benefits of due diligence? Access Due Diligence: 4 Reasons To Get A Property Tax Analysis Before Buying, a free tip sheet for a deeper dive into this subject.

Find out why the due diligence process is beneficial before buying commercial real estate.

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