Buying commercial property? Start here. Proper due diligence protects you from hidden risks and costly surprises. Here's what you need to know upfront:
- Timeline: Commercial property due diligence typically takes 3 months for developed properties and up to 18 months for raw land.
- Key Areas to Review:
- Financial records (rents, expenses, taxes).
- Legal documents (title, liens, zoning).
- Building condition (structure, HVAC, ADA compliance).
- Lease agreements (terms, tenant responsibilities).
- Local issues (Oklahoma-specific taxes, mineral rights).
- Oklahoma Challenges:
- Severed mineral rights give priority to underground resources.
- Ad valorem taxes range from 1%-1.5% annually.
- Tornado safety and tribal land status require extra attention.
Why it matters: Oklahoma's real estate market is complex, with unique hurdles like declining values (-15% projected by 2025). Skipping due diligence could leave you liable for defects or non-compliance. Follow this guide to minimize risks and make informed decisions.
6 Tips on Due Diligence for Commercial Real Estate
Financial Records Check
Conducting a detailed review of financial records is a key step when evaluating commercial properties in Oklahoma.
Revenue and Cost Analysis
Examining three years of Income and Expense (I/E) statements can uncover patterns and highlight potential concerns. Focus on these critical components:
- Base Rental Income: Compare the actual rents collected to the amounts specified in lease agreements.
- Operating Expenses: Scrutinize costs associated with property management, maintenance, and utilities.
- Net Operating Income (NOI): Assess the property's earning potential after accounting for expenses.
- Capital Expenditures: Review major improvements and their impact on the property's value.
- Vacancy Loss: Analyze historical vacancy rates and their financial implications.
When combined with the rent roll, these figures help determine the property's value, purchase price, NOI, and cap rate. Once this analysis is complete, confirm the property's tax records to ensure all obligations are accounted for.
Property Tax Review
Property taxes are a core item in commercial property due diligence - Oklahoma ad valorem property taxes range from 1%-1.5% annually. Use the Oklahoma County Treasurer's website to verify:
- Current year tax obligations.
- Tax records from the past six years.
- Any unpaid taxes or liens on the property.
- Special assessments or exemptions.
It's essential to rely on the official Oklahoma County Treasurer's website rather than third-party platforms for accuracy. Keep in mind that property tax rates can vary widely depending on the property's location and type.
After confirming tax details, move on to reviewing existing mortgages and liens.
Mortgage and Lien Search
Oklahoma's lien laws can be intricate, given the variety of potential liens. A thorough search should include:
| Lien Type | Duration | Priority |
|---|---|---|
| Mortgage Liens | Term of the loan | Typically first position |
| Mechanics Liens | Filed within 4 months | May take priority over existing liens |
| Property Tax Liens | Until paid | Generally superior to other liens |
| HOA Liens | Varies | May have special priority status |
Under Oklahoma law, judgment liens are valid for five years and can be renewed, while income tax liens last for ten years with possible extensions. The Oklahoma Construction Lien Law (42 Okl.St.Ann § 141) outlines specific rules for contractors' claims, requiring filings within four months of completing work.
To ensure thoroughness, hire a title professional to conduct a complete title search. They can access detailed records through the county clerk's office and identify claims that might not be apparent from basic searches.
Legal Requirements
Property Title Check
Before moving forward with a commercial property transaction, it's essential to perform a thorough title review with a qualified professional - a core legal step in commercial property due diligence. This process ensures clarity on ownership and identifies any potential issues like liens, covenants, or easements. Key documents to review include:
- Title policy: Confirms ownership and lists any exceptions.
- UCC filings: Highlights any security interests or liens on the property.
- Judgment liens: Reveals court orders or tax liens affecting the property.
- Survey records: Verifies property boundaries and easements.
- Restrictive covenants: Details any limitations on property use.
Once the title review is complete, confirm that the property aligns with local zoning standards for your intended use.
Zoning Rules Check
Zoning compliance is critical when assessing a property's suitability for your plans. To ensure the property meets local zoning regulations (as outlined in Chapter 59 of the Oklahoma City Municipal Code), follow these steps:
- Check the zoning designation: Use the City of Oklahoma City's online zoning map to identify the current designation.
- Confirm permitted uses: Ensure your intended use aligns with the activities allowed under the zoning rules.
- Review specific requirements: Pay attention to lot size, density restrictions, setbacks, parking, and landscaping standards.
In addition to title and zoning checks, environmental considerations are a crucial aspect of property evaluations in Oklahoma.
Environmental Report
A Phase I Environmental Site Assessment (ESA) is a standard requirement to evaluate environmental risks. This process involves:
- Reviewing past uses: Look into historical records, aerial photographs, and conduct interviews with previous owners to understand the property's history.
- Identifying potential environmental issues: Document Recognized Environmental Conditions (RECs), such as contamination risks or hazardous materials.
- Ensuring regulatory compliance: Check for any unresolved environmental violations.
If the Phase I ESA uncovers potential contamination, a Phase II ESA becomes necessary. This involves soil and groundwater testing to determine the extent of the issue. For additional guidance in Oklahoma City, you can consult local redevelopment programs and collaborate with state agencies like the Oklahoma Department of Environmental Quality, the Oklahoma Corporation Commission, and the Oklahoma Water Resources Board.
Building Condition Assessment
Building Systems Check
A building condition assessment - covering structural elements, HVAC, plumbing, and electrical systems - is a core step in commercial property due diligence. Evaluating these systems determines the building's condition and upcoming maintenance needs. Here are the primary systems to review:
Structural Elements
- Assess the foundation for stability and any signs of settling.
- Examine load-bearing walls and support beams for wear or damage.
- Inspect the roof for proper drainage and overall condition.
- Review external walls and façade materials for cracks or deterioration.
HVAC System
- Check the age of the unit and its maintenance records.
- Evaluate the system’s cooling and heating capacity.
- Inspect ductwork for efficiency and leaks.
- Ensure compliance with applicable building codes.
Plumbing and Electrical
- Inspect water supply lines and drainage systems for leaks or blockages.
- Review electrical panels and wiring for safety and functionality.
- Verify the operation of emergency backup systems.
- Confirm adherence to local codes and regulations.
Once these systems are assessed, attention should shift to ensuring the property meets ADA accessibility standards.
Accessibility Standards
ADA compliance is a key requirement for commercial properties. Keith Wilkinson, Administrative Manager and ADA Coordinator for the City of Oklahoma City, highlights its importance:
"Every new building is inspected and follows the Building Code. That code incorporates the rules from the Americans with Disabilities Act, the ADA."
For older buildings undergoing renovations, updates are required to align with ADA standards. Key areas to address include:
- Accessible parking: At least one designated space for every 25 total spaces.
- Ramps: Proper installation to allow smooth access for individuals with disabilities.
- Restrooms: Ensure restrooms are accessible and meet ADA guidelines.
- Doorways: Confirm doorways provide adequate clearance for wheelchairs.
Failure to comply with these standards can result in heavy penalties, with fines up to $75,000 for a first violation and $150,000 for additional violations.
Lease Agreement Review
Reviewing lease agreements is a core step in commercial property due diligence - just as important as the financial and legal reviews when evaluating a commercial real estate investment. A well-reviewed lease can help avoid costly surprises down the road.
Lease Terms Summary
When reviewing lease agreements, pay close attention to cost allocations, responsibilities, and the specifics of each key term.
Common Commercial Lease Types:
| Lease Type | Tenant Responsibilities | Landlord Responsibilities |
|---|---|---|
| Single Net | Utilities, property tax | Maintenance, repairs, insurance |
| Double Net | Utilities, taxes, insurance | Maintenance, repairs |
| Triple Net | All building costs | Structural repairs only |
| Absolute Net | All property expenses | None |
| Percentage | Base rent plus revenue share | None |
| Modified Gross | Base rent plus partial expenses | Most operating costs |
Key areas to focus on include:
- Base Rent: Check the rent amount and any scheduled increases.
- Operating Expenses: Review how these are calculated and if there are caps.
- Utilities: Understand who is responsible for utility payments.
- Insurance: Confirm coverage requirements for both parties.
- Maintenance and Repairs: Clarify who handles upkeep and repairs.
It’s also essential to ensure that all lease provisions comply with Oklahoma tenant law.
Tenant Law Compliance
Oklahoma lease agreements must align with state laws governing deposits, evictions, and tenant rights. A detailed review of these aspects can help reduce potential risks.
Security deposits under Oklahoma tenant law:
- Confirm the limits on deposit amounts.
- Check timelines for deposit returns.
- Review acceptable deductions and any interest requirements.
Eviction Procedures under Oklahoma tenant law:
- Ensure compliance with legal notice requirements.
- Understand valid grounds for lease termination.
- Familiarize yourself with court filing processes and tenant remedies.
Sublease Rules
Subleasing clauses require close attention to confirm they align with the master lease and safeguard your interests. Proper handling of subleases is critical for legal compliance and risk management.
Key Sublease Requirements:
- Written Consent: Always secure written approval from the landlord before entering into a sublease.
- Defined Terms: Clearly outline payment, deposit, maintenance, and utility responsibilities.
- Due Diligence: Screen potential subtenants to ensure they are financially stable.
Risk Management Strategies:
- Include clauses for insurance, indemnification, and remedies in case of default.
- Document the property’s condition thoroughly before the subtenant moves in.
Local Code Compliance
Ensuring your commercial property aligns with Oklahoma's building codes is a critical step for any successful investment. The Oklahoma Uniform Building Code Commission (OUBCC) sets the baseline standards, but keep in mind that local municipalities often have more stringent requirements.
City Code Check
Commercial properties must adhere to state-level mandates while also meeting local codes. The OUBCC establishes the minimum standards for all properties, but local jurisdictions may add their own layers of regulation.
Key Areas to Verify:
| Code Category | What to Check |
|---|---|
| Building Systems | Structural integrity, occupancy limits, emergency exits |
| Energy Conservation | Insulation standards, HVAC efficiency ratings |
| Fire Safety | Sprinkler systems, alarm setups, exit signage |
| Accessibility | ADA compliance, ramp designs, doorway widths |
| Mechanical Systems | HVAC installation and ventilation requirements |
Additionally, double-check that utility systems comply with local standards to avoid future complications.
Utility Systems Review
Utility systems are another critical area to evaluate. Confirm the property's utility capacity and ensure it meets both state and local requirements. For instance, utility capacity reports from OGE Energy can provide valuable insights.
Steps for Verification:
- Request and review capacity reports and historical usage data from the Oklahoma Corporation Commission.
- Confirm service provider agreements and ensure all systems are connected and operational.
- Assess the need for backup power systems and evaluate any existing setups.
- Verify that the property adheres to local utility codes.
These steps will help you avoid costly surprises related to utility infrastructure.
Historic Building Status
If the property has historical significance, additional considerations come into play. The State Historic Preservation Office (SHPO), managed by the Oklahoma Historical Society, oversees evaluations for the National Register of Historic Places.
What to Keep in Mind for Historic Properties:
- Search the National Register database to confirm historical status.
- Document renovation restrictions and any preservation requirements.
- Investigate eligibility for tax incentives or grant programs.
- Review preservation maintenance standards and existing agreements.
- Ensure compliance with all regulations tied to historical designation.
For a preliminary evaluation of properties with potential historical value, reach out to Michael Mayes at 405-522-4479 before starting any renovations or modifications. This step can save time and help you navigate preservation requirements effectively.
Oklahoma Property Factors
When evaluating properties in Oklahoma, it's crucial to go beyond standard due diligence and focus on the state's unique challenges and requirements.
Storm Safety Features
Given Oklahoma's vulnerability to severe weather, including tornadoes, commercial properties must be equipped with effective storm safety measures. Tornadoes alone account for approximately $1.1 billion in annual damage across the U.S., and Oklahoma is one of the hardest-hit states.
Key Storm Safety Measures:
| Feature | Requirement | Purpose |
|---|---|---|
| Safe Rooms | FEMA-compliant construction | Provide protection during extreme weather |
| Warning Systems | Weather radios and sirens | Ensure early alerts for severe conditions |
| Structural Reinforcement | Wind-resistant materials | Help maintain building integrity |
| Emergency Plans | Written procedures | Outline staff safety protocols |
"Buildings that have been strengthened in critical areas and particularly at connection points, such as between the roof and walls and walls and foundation, would have a good chance of surviving intact or with minor cosmetic damage if subjected to the outer edges of a tornado." - The Hanover Insurance Group
These features are not just recommendations - they are essential for ensuring safety and minimizing risks in Oklahoma's storm-prone environment.
Tribal Land Status
One of the unique aspects of property ownership in Oklahoma is the need to verify tribal land status. This step is vital to avoid legal and operational complications. Land in Oklahoma can fall into three main categories:
- Trust Lands: Held by tribes and managed under federal trust.
- Fee Simple Properties: Owned outright without tribal restrictions.
- Allotted Lands: Often subject to specific use restrictions.
If the property is within the Osage Nation's jurisdiction, it's best to work directly with the Osage Nation Real Estate Services (ONRES). Confirming the land's status early helps ensure compliance with Oklahoma's distinct land management practices.
Mineral Rights Status
In Oklahoma, mineral rights can significantly impact property value and usage. It’s critical to review all relevant documentation to confirm the status of these rights. Important records to examine include:
- Ownership records for current mineral rights.
- Surface damage agreements.
- Existing lease arrangements.
Keep in mind that title insurance does not cover surface damage, so it’s essential to address this separately. Registering with the Oklahoma Mineral Owner Registry and maintaining open communication with mineral rights holders can help prevent disputes and streamline the acquisition process. By tackling mineral rights issues upfront, you can avoid costly delays and ensure a smoother transaction.
Conclusion
Conducting thorough due diligence is a must when investing in Oklahoma's commercial real estate market. Unlike residential properties, commercial investments come with fewer legal protections for buyers, making it essential to approach each deal with care and attention to detail.
Local market trends also play a key role in shaping investment outcomes. For instance, Oklahoma City offers a mix of opportunities and challenges, fueled by growth in sectors like information technology, healthcare, and administration. Oklahoma City's commercial real estate market currently shows a 4.2% industrial space vacancy rate and an 11.8% office vacancy rate - numbers that highlight the need for careful analysis and strategic decision-making in commercial property due diligence.
By following the steps outlined in this guide - covering everything from financial and legal evaluations to building inspections and compliance with local regulations - investors can minimize risks and make informed decisions. It’s worth noting that Oklahoma law places the responsibility for undiscovered defects on the buyer if inspections are inadequate. This underscores the importance of rigorously addressing every aspect of the due diligence process.
This guide's comprehensive approach - spanning financial records, legal obligations, property conditions, lease agreements, and Oklahoma-specific considerations - equips investors with the tools to navigate the complexities of commercial property acquisitions effectively. Trio CRE, a commercial real estate brokerage serving Edmond and the Oklahoma City metro, helps buyers work through each of these due diligence steps - from financial records and title review to Oklahoma-specific issues like mineral rights and tribal land status.
"Due diligence is a comprehensive, complex, and critical stage in any commercial real estate acquisition. You don't want to leave any stone uncovered, and you want the most time available to review all documents and look for any and all possible red flags with the property, title, tenant relationships, and numerous other considerations." – Thompson Coburn LLP
FAQs
What financial documents should you review when performing due diligence on a commercial property in Oklahoma?
When evaluating a commercial property, diving into the financial documents is a must to make sure the investment holds up. Start by examining the income and expense statements - these will give you a clear picture of how profitable the property is. Next, check the rent rolls to confirm tenant leases and occupancy levels. Finally, review the property tax bills to understand the tax responsibilities tied to the property. Together, these records paint a picture of the property's financial condition and can reveal any potential issues.
What unique challenges in Oklahoma, like severed mineral rights and tornado safety, should investors consider during commercial property due diligence?
Oklahoma comes with its own set of challenges when it comes to commercial real estate due diligence. One major factor to consider is severed mineral rights. In Oklahoma, it's not uncommon for the surface owner of a property to lack ownership of the minerals beneath it. This can create potential conflicts if the mineral rights owner decides to extract resources. To avoid surprises, it's crucial to verify who owns these rights and review any existing agreements tied to the property.
Another key concern is tornado safety. Being in Tornado Alley, Oklahoma properties are at higher risk of severe weather events. It’s important to assess the structural integrity of the building, confirm the presence of storm shelters, and ensure adequate insurance coverage is in place. Taking these steps during the due diligence process can help safeguard your investment and reduce the likelihood of unexpected issues.
What steps should I take to ensure a commercial property meets Oklahoma's zoning and environmental regulations?
To ensure a commercial property in Oklahoma meets zoning and environmental regulations, begin by examining the Oklahoma City Municipal Code. This code outlines what activities are allowed and restricted in specific zones. For environmental compliance, refer to the Oklahoma Department of Environmental Quality (DEQ) to understand state-specific rules and guidelines. Don’t forget to consider any applicable federal environmental regulations that might impact the property.
Partnering with local experts - like zoning consultants or environmental specialists - can make the process smoother. Their expertise can help you navigate complex regulations and avoid potential obstacles when acquiring the property.
