Due Diligence: The Questions That Protect the Deal

Last Updated: May 2026
Read Time: 10-12 minutes
Author: Andrew Lofredo, CEO, CRE Vertical Advisors

The LOI is signed, the excitement is high, and the instinct is to push toward closing. The deal feels right. The numbers penciled out in preliminary underwriting. The market story makes sense and, without care, due diligence (“DD”) is solely focused on proving that story is accurate.

The purpose of due diligence isn't to just confirm what you already believe about a deal. It's to find out what you don't know and decide what to do about it before you're committed. Every acquisition contains unknowns. The question is whether you surface them during the diligence period, when you still have options, or after closing, when you don't.

This article walks through the full due diligence process as we approach it - nine categories, each with a distinct purpose, and each connected to the underwriting and strategy decisions that determine whether a deal performs as modeled or quietly underperforms for years.

Before You Spend a Dollar on Diligence: Confirm the Thesis

One of the most common mistakes in due diligence (or preliminary DD) isn't missing a physical defect or misreading a lease provision. It's spending significant time and money on a deal that doesn't fit the investment thesis in the first place.

Before ordering third-party reports, engaging environmental consultants, or putting outside counsel on the clock, confirm in writing that the investment committee or principal is still aligned on the fundamentals: asset type, strategy (core, value-add, opportunistic, etc.) target hold period, and return profile. Confirm that the purchase price still makes sense against the underwriting model, and that the underwriting model is using actual in-place leases rather than pro forma assumptions.

Identify the key risks upfront - the findings that would be deal-breakers versus those that are negotiable and document them before diligence begins. This exercise forces clarity on what you're testing for, and it prevents the common failure mode of discovering a serious problem late in the process and proceeding anyway because the sunk cost (both time and money) of diligence makes walking away feel expensive.

Diligence is expensive. The decision to stop spending money on a deal that doesn't work is always cheaper than closing on one.

Financial Diligence: Verify Everything Independently

We are not implying that they are misleading, but the offering memorandum (“OM”) is a marketing document. The seller's financial presentation is a starting point. Neither is a substitute for independent verification against source documents, and the gap between a seller's presentation and what the numbers actually show is where deals get mispriced most often.

Income Verification

Start with the rent roll and work backward. Every income item in the trailing financials should be supported by a signed, executed lease. Pull the trailing 12 and 24 months of actual operating statements and reconcile them against the rent roll line by line.

Identify one-time and non-recurring income items and remove them from stabilized underwriting. A lease termination fee, an insurance proceeds payment, a special assessment recovery - these aren't part of the ongoing income stream regardless of how they appear in the trailing P&L.

CAM, tax, and insurance recovery billings deserve particular scrutiny. Confirm they're consistent with the lease language, confirm they've been collected, and look specifically for underbilled recoveries that represent genuine post-closing upside. A prior owner who who wasn't tracking cumulative cap balances, may have been leaving recovery income on the table for years (For more information on CAM Recs – check out our Article - The CAM Reconciliation: A Direct Line to NOI). That's an opportunity - but only if you identify it during diligence rather than assuming the trailing recovery income represents what the leases actually support.

Free rent periods, abatement provisions, and tenant concessions need to be confirmed and correctly reflected in both the trailing financials and the forward model. A lease that shows $50,000 in monthly rent but has six months of free rent remaining isn't a $50,000 per month income stream - it's a $0 per month income stream for the next six months, and your underwriting needs to reflect that, or it is an opportunity to have the seller place that amount in escrow so you as the buyer are made whole.

Expense Verification and Normalization

Expenses require the same rigor as income. Obtain actual invoices for all major expense categories and don't rely solely on summary statements. The summary number is what the seller wants you to see. The invoices tell you what was actually spent and why.

Normalize management fees - if the seller self-managed or used a below-market affiliated manager, restate the management fee at market rate before you underwrite NOI. The delta between a 1% affiliated management fee and a 4% market-rate fee on a $5 million revenue property is $150,000 annually.   Keep in mind, this can go in either direction, it is not unheard of for a seller to overload their management team with support staff because the pass throughs are favorable.

Identify any seller-paid expenses that become buyer obligations post-closing. Identify related-party contracts - management, maintenance, landscaping, leasing - and assess whether they're at market and whether they should be assumed or canceled at closing. In addition to whether they should be cancelled – you need to vet the agreements to see if they can be terminated, i.e. is there a termination on sale of a regular 30 day termination option.

Capital expenditures must be properly separated from operating expenses. A seller who has been capitalizing roof repairs or HVAC replacements and not expensing them is presenting a lower expense base and a higher NOI than the property is generating. That inflated NOI flows directly into the purchase price. Catching it requires looking at the actual invoices, not just the summary statements.

Real Estate Tax

Confirm real estate tax (RET) assessment history and payment status. Outstanding assessments and pending appeals affect underwriting. A successful tax appeal that the seller is navigating could represent upside or a pending reassessment could represent a future expense increase that isn't in the trailing numbers.  Additionally, if you are in a jurisdiction that prohibits appeals if the owner does not file their income and expense forms, then make sure the Seller has timely complied, otherwise your underwriting which assumes a lower RET may miss the mark.

Lease and Revenue Diligence: The Leases Are the Asset

In commercial real estate, the cash flow is only as good as the leases generating it. Lease review is much more than a legal exercise, it's a financial and strategic one, and it deserves the same analytical rigor as the financial diligence.

Lease Document Review

Obtain every fully executed lease for every tenant, including, every amendment, side letter, rider, and guaranty. Sellers sometimes provide lease abstracts in place of actual lease documents during early diligence. Abstracts are a useful starting point. They are not a substitute for reading the actual documents.

Confirm the rent roll matches every executed lease. Note every discrepancy. A tenant showing $40,000 per month on the rent roll whose lease reflects a scheduled escalation to $43,000 six months ago is either being underbilled or the rent roll is wrong. Either way, it affects your underwriting.

Review all renewal, expansion, contraction, and termination options - confirm notice periods, conditions that must be satisfied, and the economic terms. A below-market renewal option on a major tenant that the prior owner didn't track is a commitment that transfers to you at closing whether you know about it or not. The same applies to ROFO and ROFR rights - confirm whether any are triggered by this sale and whether existing tenants must be notified before closing.

Co-tenancy clauses deserve specific attention, particularly in retail properties. A clause that allows inline tenants to pay reduced rent - or terminate entirely - if an anchor vacates or falls below a specified occupancy threshold is an asset management problem, not just a legal one. Understanding which tenants have these provisions, what the trigger conditions are, and what the economic consequences look like gives you a materially different picture of the property's income stability than the rent roll presents.

Estoppels

Tenant estoppel certificates are one of the most underutilized tools in acquisition due diligence. Many buyers treat them solely as a lender requirement and collect them because the bank requires a certain percentage, confirm the basic lease economics, and move on.

Since you have to get them anyway – increase their usefulness. Read every estoppel against the actual lease. A tenant that asserts a landlord default in an estoppel is telling you something the rent roll, the operating statements, and the seller will never disclose voluntarily. A tenant that reports a different lease commencement date, a different rent figure, or a different TI allowance balance than the lease reflects is flagging either a discrepancy or a dispute, and either one needs to be resolved before closing.

Request estoppels from every tenant representing a material portion of revenue. Don't accept a threshold that leaves the majority of income unestoppeled. Your lender will have a minimum threshold – feel free to exceed it if you have concerns about the quality of the lease data.

Tenant Credit and Retention Assessment

The rent roll shows you what tenants are paying. Credit and retention analysis tells you how long they're likely to keep paying it.

For publicly traded tenants, SEC filings provide the most current picture of financial health. For private tenants, payment history, Dun & Bradstreet reports, and financial statements where obtainable give a reasonable proxy. Review payment history for all tenants -chronic late payers and tenants with a history of disputes are telling you something about the tenancy that will not appear in the trailing financials.

Assess renewal probability for tenants with near-term expirations. A tenant whose lease expires in 18 months and who is using 60% of their space in a market with multiple alternatives is a retention risk. If the underwriting assumes renewal at market rent, the renewal probability needs to be explicitly evaluated rather than assumed.

For anchor tenants in retail or large tenants in office or industrial, assess the downstream impact of vacancy. A co-tenancy provision that triggers rent reductions across 40% of inline tenants if the anchor vacates can turn a 15% occupancy loss into a 35% revenue loss.

Physical and Environmental Diligence: Know What You're Buying Before You Price It

Physical diligence is the category most buyers take seriously from the start — you hire an engineer, you get a Property Condition Assessment, you order the Phase I environmental. The execution is generally competent. The analysis is often not.

Property Condition Assessment

The Property Condition Assessment (“PCA”) gives you a snapshot of building system condition and estimated remaining useful life. What it doesn't do automatically is connect those findings to your business plan, your hold period, and your lease provisions.

A 12-year-old HVAC system with an estimated remaining useful life of 8 years isn't just a capital planning item - it's a question about whether replacement costs are recoverable under your leases, whether the recovery is subject to amortization requirements, and whether your 10-year underwriting is carrying an expense that materially affects returns in Years 8 through 10. Those are asset management questions, not just physical plant questions.

Obtain near-term and long-term capital cost estimates from the PCA and incorporate them into the underwriting before you finalize the purchase price, not after. Confirm whether any existing warranties are transferable at closing - a roofing warranty with five years remaining that stays with the seller because you didn't ask is a real cost.

If the PCA surfaces specific concerns - HVAC, electrical, structural - supplement the general engineer's opinion with a targeted review by a specialist vendor. A general PCA gives you a broad picture. A mechanical engineer reviewing specific aging equipment gives you a defensible cost estimate.

Additionally, depending on the size of the asset and type of lender, the PCA may trigger additional reserves that you your underwriting may have not contemplated – tying up cash flow and impacting your initial plan.

Environmental Diligence

Order the Phase I on day one of the diligence period. Environmental consultants have real lead times and the Phase I is commonly on the critical path. Waiting until week two or three to initiate it is a scheduling error that compresses the back end of your diligence period when you can least afford it.

If the Phase I identifies recognized environmental conditions or the site history warrants it, a Phase II is required. Confirm whether your purchase and sale agreement gives you the right to take soil samples on the property since some agreements require seller consent, and some sellers will resist. Negotiate access rights early, before you need them.

For older buildings, confirm asbestos-containing material surveys and management plans. Depending on the jurisdiction and the business plan, ACM in common areas or tenant spaces can affect renovation timelines, contractor costs, and regulatory compliance - all of which affect the underwriting.

Flood zone status matters for insurance costs and lender requirements. If the property is in a Special Flood Hazard Area, mandatory flood insurance can add materially to operating expenses and may not have been included in the seller's expense presentation.

Zoning and Land Use

Confirm current zoning and that all existing uses are permitted as-of-right. Non-conforming uses that are grandfathered under current ownership may not survive a change of ownership or a significant renovation and it is critical to understand the implications before you close.

If the business plan involves any change of use, densification, or development, confirm the entitlement path before closing. A value-add strategy that requires a zoning variance is a different risk profile than one that doesn't, and the timeline and cost of entitlements need to be reflected in the underwriting, not discovered after closing.

Legal and Title Diligence: Confirm You're Buying What You Think You're Buying

Engage legal counsel on day one. Title commitment review, lien searches, entity authority verification, and loan document review all require time and may surface issues that require negotiation or additional investigation before closing.  It is absolutely maddening to get hit with a title delay as you approach your closing date.

Title and Survey

Order the title commitment early and read (have your attorney read) every Schedule B exception carefully. Standard exceptions are not uniformly benign and may affect the property's use, financing, or value in ways that require resolution before closing. Work through your title counsel's objections methodically and don't accept exceptions you don't understand.

Review all recorded easements, CC&Rs, deed restrictions, and encumbrances against the business plan. An access easement that restricts parking, a CC&R that limits building height, a reciprocal easement agreement with an adjacent property that imposes maintenance obligations - these are operational and financial constraints that affect underwriting.

The ALTA survey confirms the physical reality of the property against the legal description. Confirm it shows all improvements, easements, and encroachments, and verify that the surveyed square footage aligns with the purchase price assumptions. An encroachment by or onto the property needs to be resolved before closing, as it becomes significantly harder to address after the fact.

Existing Debt

In a market where financing costs have reset materially, the structure of the debt you're retiring or assuming can change the return profile of a deal as much as any operational variable.

Confirm the payoff amount, prepayment penalty, and required notice period. Model defeasance or yield maintenance costs in full as a line item in the closing cost analysis. The cost of retiring a fixed-rate loan in a rising rate environment can be significant, and it needs to be incorporated into the purchase price analysis, not discovered at the closing table.

If you're assuming the existing loan, obtain the full loan package and review all covenants, reserve requirements, and assumption conditions. Confirm lender approval timelines - a 60-day lender approval process in a 45-day diligence period is a scheduling problem that needs to be addressed in the contract before you execute.

Confirm all lender-held reserves and their balances. Reserve balances that transfer to the buyer are real value. Alternatively, reserve balances that don't - because the PSA doesn't address them or because the seller has been drawing them down - are real losses.

Litigation and Regulatory Review

Obtain full disclosure of all pending or threatened litigation at the property and seller-entity level. Review any outstanding regulatory violations, compliance orders, or enforcement actions. Confirm no eminent domain or condemnation proceedings are pending or threatened.

Confirm the property has a valid and current certificate of occupancy for all uses. Open or expired building permits that the seller hasn't disclosed can become closing obstacles and post-closing liabilities. Make resolution of open permits a closing condition - not a post-closing obligation.

Debt and Financing Diligence: The Capital Stack Drives Returns

The financing structure affects returns, flexibility, and risk more than almost any other variable in the deal and it's one of the categories most often underwritten optimistically and verified last.

Confirm the financing plan before you spend significant money on diligence -senior debt, mezzanine, preferred equity, or all-equity and confirm all capital is committed (or at least understand the risk if not all is committed). A diligence process that assumes financing that isn't secured is a process that can collapse at the worst possible moment.

Obtain the lender's term sheet and review all covenants, reserve requirements, and recourse provisions before you finalize the underwriting. Required lender reserves at closing, such as, tax, insurance, replacement, and rollover reserves, affect the equity required at closing and the projected distributions to investors. These often are not trivial numbers. On a $20 million acquisition with standard reserve requirements, funded reserves can add $500,000 to $1,000,000 to the equity requirement. That needs to be in the equity funding model from the beginning.

Confirm the rate lock strategy and the cost of a rate cap if the lender requires one. In a volatile rate environment, the cost of a compliant interest rate cap can be material and it's a real cost that belongs in the returns analysis.

Confirm the prepayment structure relative to the business plan. A loan with a lockout period that extends through the planned exit window is a real constraint on disposition flexibility. It needs to be known and modeled, not discovered when you're ready to sell.

Market and Competitive Diligence: Underwriting Is Only as Good as the Market Data Behind It

Underwriting assumptions are always market-dependent -rent growth, absorption, exit cap rate, vacancy trends. The quality of those assumptions depends on the quality of the market data supporting them.

Obtain current submarket data from credible sources, including, vacancy rates, net absorption, average asking and effective rents, and concession levels (don’t forget concessions). Assess the trajectory of the submarket: is vacancy tightening or expanding, and what's driving the trend? A submarket with declining vacancy and rising effective rents supports different underwriting assumptions than one with flat vacancy and increasing concessions.

Review the supply pipeline for the hold period. New deliveries or significant renovations planned within the competitive set can affect leasing velocity and rent achievement in ways that the current submarket snapshot won't reveal. Model the competitive impact of planned supply explicitly.

Identify the five to ten most directly competitive properties and obtain their current asking rents, concession levels, and vacancy. Assess where the subject property wins and where it's disadvantaged relative to the competitive set. A property with strong fundamentals but a weak physical amenity position relative to its competition faces real leasing headwinds that need to be reflected in the absorption and rent assumptions.

Review recent comparable lease transactions to validate rent assumptions, and recent comparable sales to validate the exit cap rate. What is the buyer depth, i.e., the number of credible buyers for this asset type and size at the modeled exit, this is a real factor in exit strategy that's often treated as an assumption rather than an analysis.

Closing Logistics: Plan the Closing With the Same Rigor as Diligence

Closing is an operational event. A closing that falls apart because entity formation wasn't completed, investor equity wasn't wired on time, or a title exception wasn't resolved is as costly as any diligence failure.

Confirm the buyer entity is formed and in good standing before closing – and if it is a Delaware entity, is it filed to do business in the state where the property is located. Confirm all investor equity commitments are documented and capital call notices have been issued with adequate lead time. Confirm the equity funding wire timeline is compatible with the closing date and the bank's wire cutoff times. These are logistics, not legal issues, but they have derailed closings.

Confirm that property and liability insurance is bound and effective as of the closing date with no gap in coverage, and for the love of all that is holy, make sure the lender’s insurance representative approved the COIs. Confirm utility account transfers are scheduled to coincide with closing. Confirm all vendor notifications, contract assignments, tenant welcome letters, and key transfers are prepared and ready to execute on closing day.

Now that you are about to take over the property – the fun starts, so confirm that the asset management and property management onboarding checklists are ready to activate immediately post-closing. The transition from the seller's management to your management creates significant operational risk.

The Go/No-Go Decision: Every Finding Needs a Disposition

At the end of the diligence period, every material finding from every category - physical, financial, lease, legal, market, environmental - needs a disposition before you close. There are four acceptable outcomes for any material finding: resolved, reflected in a purchase price adjustment, mitigated by a seller representation and warranty, or accepted as a known and quantified risk.

If a finding doesn't fit into one of those four categories, you're not done with diligence.

The go/no-go decision needs to be made on the merits, not under deadline pressure. The diligence period expiration creates real urgency - deposits may be at risk, the seller may be fielding other interest, however, it is not a reason to close on an unresolved issue. It's a reason to request an extension or exercise a termination right.

Run the downside scenario before you commit. Incorporate the two or three most significant risks identified during diligence into a revised underwriting model and confirm that the downside return is acceptable and that the debt is serviceable under that scenario. If the downside scenario produces a result that would not have been acceptable at the time you signed the LOI, the diligence process has done its job - it's telling you something the offering memorandum did not.

Walking away is hard. It's harder when you've spent real money on third-party reports, outside counsel, and internal time. But the sunk cost of a diligence process is always smaller than the carrying cost of a deal that underperforms for the duration of a five or ten-year hold. A disciplined diligence process with the right professionals in each category is the only reliable protection against closing on a deal that looked better on paper than it performs in practice.

The Strategic Bottom Line

Due diligence is not a checklist exercise. It's a structured process for converting uncertainty into information, and for making sure that the information you collect actually connects to the underwriting decisions and strategy assumptions that determine how the deal performs.

Every category of diligence - physical, financial, lease, legal, market, financing, is connected to every other one. A physical finding that seems like a capital planning issue may be a recovery income issue under the lease provisions. A financial finding that looks like an expense normalization may connect to a legal finding about related-party contracts. A lease provision that looks like a minor tenant right may have material implications for exit strategy and buyer pool at disposition. The diligence process is only as strong as the team's ability to connect findings across categories and translate them into underwriting adjustments and strategy decisions.

The investor who builds a team capable of surfacing and connecting findings across all nine categories, consistently makes better acquisition decisions than one who treats it as a box-checking exercise on the path to closing.

We've built a comprehensive acquisition due diligence checklist that covers all nine categories with the same level of detail and strategic framing reflected in this article. It's the framework we use internally and with our clients - available as a free download below.

This article is for general informational and educational purposes. Every acquisition is different, and the due diligence process for any specific transaction requires careful legal, financial, and professional review tailored to that asset and deal structure. CRE Vertical Advisors works alongside family offices, high-net-worth investors, and their advisors through every phase of the acquisition process - from preliminary underwriting through closing and asset management transition. Contact us to discuss your next acquisition.