Commercial Property Due Diligence: What to Check Before Buying

What is commercial property due diligence?

Commercial property due diligence answers a single question: is the income stream as durable, and as valuable, as the asking price assumes? Every other question reduces to this one. A commercial property with a strong tenant on a long lease at market rent is a fundamentally different asset to the same building with a weaker tenant on a shorter lease, even when the address is identical.

What should you check first?

The investigation has six layers. Do them in this order.

1. The lease

The lease document is the asset, more than the building. Read every clause. The clauses that matter most:

• Term and option periods. How long is the current lease, and are there renewal options? An option held by the tenant is the tenant's choice, not yours.
• Rent and review structure. What is the current rent, what is the review mechanism (CPI, fixed percentage, market review), and when do reviews occur?
• Outgoings. Are outgoings recoverable from the tenant? Which outgoings, and to what extent?
• Incentives. Were rent-free periods, fit-out contributions, or other incentives offered? If so, the headline rent overstates the effective rent.
• Make-good clauses. What is the tenant required to do at the end of the lease?
• Bank guarantee or security deposit. How much, in what form, and how is it released?
• Permitted use. What can the tenant use the premises for, and what restrictions apply?
• Assignment and subletting. Can the tenant transfer the lease, and on what terms?

A lease review by a commercial property lawyer is not optional. Budget for it before you make an offer.

2. The tenant

A lease is only as good as the tenant signing it. Tenant due diligence includes:

• The tenant's legal entity and ownership structure
• Trading history and financial strength, where it can be verified
• Industry concentration and exposure
• The role this site plays in the tenant's broader operations (head office, satellite, distribution point)
• Public credit profile and search results

A strong lease with a weak tenant carries the tenant's risk, not the lease's strength. The reverse is also true: a short lease with a national-grade tenant who has occupied the site for fifteen years is often more durable than a long lease with a new entity.

3. The building and the site

Building and site due diligence covers:

• A building condition report, including structural, services, fire, and accessibility compliance
• An environmental assessment, particularly for industrial sites or sites with historical use concerns
• A survey identifying easements, encroachments, and boundary issues
• Zoning confirmation and current and future planning controls
• Heritage overlays, if any
• Capital expenditure forecasts: roof, HVAC, lifts, facade, car park resurfacing

The investigation should produce a maintenance and capital expenditure plan for the next ten years. Surprise capital costs are the most common reason a yield assumption fails to materialise.

4. The title and the contract

The standard title and contract checks apply, but with commercial-specific layers:

• Title search for encumbrances, caveats, easements
• Council and water authority searches
• Land tax and rates currency
• GST treatment (going concern, taxable supply, margin scheme)
• Contract special conditions specific to commercial

A commercial conveyancer or property lawyer drives this layer.

5. The numbers

The financial due diligence builds the income statement from the lease and the outgoings.

• Gross income (face rent, plus any other income)
• Less recoverable outgoings (where the lease structure allows)
• Less non-recoverable outgoings and management
• Equals net income, which is what the yield is calculated on

Compare the net income against the asking price to derive the net yield. Compare the net yield against current evidence in the market for comparable assets. This is the commercial equivalent of comparable sales, and the data is patchier than residential.

6. The market

Finally, layer in the market context:

• Vacancy rates for the asset class and location
• Rental trends and supply pipeline
• Sales evidence for comparable assets
• Tenant demand fundamentals (employment, infrastructure, population)

Market evidence sets the context for whether the lease is at, above, or below market rent, which matters when the lease comes up for renewal.

Common commercial due diligence mistakes

The mistakes that cost commercial buyers the most:

• Buying on face rent without checking effective rent after incentives
• Underestimating capital expenditure on services and facade
• Accepting the selling agent's outgoings schedule without verification
• Buying a long lease without due diligence on the tenant
• Missing GST treatment and being surprised at settlement
• Skipping the environmental assessment on industrial sites
• Treating commercial as "residential, but bigger". It is not.

Summary

Commercial due diligence is the structured investigation of the lease, the tenant, the building, the title, the numbers, and the market. The income stream is the asset; the building is the wrapper. Most failed commercial investments fail in the lease and the tenant, not in the building. Read the lease in full. Verify the tenant in full. Budget for the lawyer.

If you are evaluating a commercial acquisition and want a structured second opinion before exchange, the services overview explains how we approach commercial briefs, and the contact page is the fastest route to a conversation.