Commercial investment and purchase diligence

Define the acquisition’s purpose

An owner-user primarily needs a property that supports the business; an investor needs an evidence-based view of tenancy and cash flow. Redevelopment adds approval, construction, timing, and leasing risks. State the purpose, hold period, capital budget, and acceptable downside before comparing buildings.

For an owner-user, evaluate the cost of ownership against a realistic leasing alternative, including financing, taxes, insurance, repairs, improvements, and liquidity committed to the building. For industrial assets, first confirm operational suitability.

Underwrite the documents, not the headline

• Rent roll and leases: reconcile tenants, occupied areas, rent, deposits, expirations, options, concessions, and amendments to signed documents.
• Collections: distinguish scheduled rent from collected income and identify arrears or disputes.
• Expenses: review taxes, insurance, maintenance, management, utilities, and recoveries using records, not only a marketing summary.
• Capital: estimate repairs, replacements, tenant improvements, and leasing costs separately; they can substantially affect cash needs.
• Vacancy and rollover: model downtime, concessions, and replacement-tenant costs rather than assuming uninterrupted occupancy.

Net operating income (NOI)

Generally property income less property operating expenses, before debt service and income taxes. Capital expenditures and some reserve treatments are commonly presented separately; document the convention used in every comparison.

Capitalization rate

NOI divided by price or value on the stated basis. A rate derived from projected income is not the same as one derived from current documented income, and neither guarantees a return.

Cash flow to equity

Requires accounting for financing and capital cash needs beyond NOI. Purchase costs, principal repayment, sale costs, and taxes also affect the investor’s overall outcome.

Any projected rent or resale value should be clearly labeled as an assumption and supported by relevant evidence. Do not treat an asking price or optimistic pro forma as a completed comparable transaction.

Test financing and downside explicitly

Review interest rate, amortization, maturity, recourse, covenants, reserves, fees, prepayment terms, and any balloon payment. A lender’s approval does not replace your own diligence.

Debt service coverage ratio (DSCR) compares a defined income measure with required debt service. Lenders can calculate qualifying income and debt service differently, so confirm their definitions and requirements; there is no universal threshold represented here.

• What happens if a major tenant leaves or stops paying?
• Can the budget absorb higher taxes, insurance, or an unexpected roof replacement?
• What if refinancing costs more or proceeds are lower at maturity?
• How much additional equity is needed if approvals, construction, or leasing take longer?
• What if sale proceeds are lower than planned or the property takes longer to sell?

Compare a documented base case with clearly stated downside cases. Avoid describing appreciation, refinancing, or exit liquidity as certain.

Organize diligence before deadlines expire

1. Legal and title: have counsel and title professionals review ownership, title exceptions, survey matters, easements, access, contracts, and the purchase agreement’s deadlines and remedies.
2. Use and approvals: confirm zoning, permitted activity, occupancy and building requirements, and any approval conditions. Use the Chicago property-research checklist.
3. Physical condition: commission inspections suited to the asset, including roof, structure, building systems, pavement, and other material components. Translate findings into a timed capital plan.
4. Environmental: consult an environmental professional about appropriate assessment, historical uses, and any further investigation. A Phase I assessment is not a guarantee that contamination is absent.
5. Tax and insurance: verify parcel-level history and obtain advice and quotes for the proposed ownership and use, rather than assuming the seller’s costs continue.
6. Tenancy and closing: review leases, amendments, tenant confirmations where appropriate, deposits, rent prorations, service contracts, and the documents required to close.

EPA’s All Appropriate Inquiries guidance explains a framework relevant to certain environmental-liability protections. Completing an assessment alone does not establish eligibility for every protection; timing, purchaser status, and continuing obligations require professional advice.

For industrial acquisitions, the Chicagoland nine-county Illinois hub provides local research paths beyond Chicago city and Cook County. Match each PIN to its actual county and authority, and distinguish current zoning from planned land use before underwriting expansion or a new tenant's operation.

Official sources for verification

• Cook County Assessor and Cook County Treasurer — assessment and tax research for Cook County parcels.
• EPA: All Appropriate Inquiries — environmental due-diligence background and limitations.
• FEMA Flood Map Service Center — mapped flood-hazard information.
• Chicago Department of Buildings — city building and permitting resources.

Review commercial lease terms and obligations when assessing a leased investment or comparing ownership with renting.