Securing financing for a commercial real estate deal is only half the battle—the other half is knowing what can quietly sabotage your investment. Ideally, you will want to have addressed all these issues in your due diligence period. And it’s yet, another reason why you should consider working with an INVESTOR-FRIENDLY commercial mortgage broker. We would have time to discover and address these issues before they reached the lender’s underwriter or worse, after you have closed!

This streamlined list reveals some of the most common hidden risks in commercial properties and some simple suggestions for how to spot and/or resolve the issue.

As always, please consult with a subject matter expert to help you with your respective issue.

1. Environmental Contamination

Industry Term: Phase I / Phase II Environmental Site Assessment (ESA)

When to Watch for it: During Due Diligence (Pre-Closing) – Order Phase I ESA immediately after PSA (Purchase Sales Agreement) execution.

Why it’s dangerous:

• Properties with past uses like gas stations or dry cleaners may have hazardous soil or groundwater contamination.
• Lenders WILL NOT fund deals without a clean environmental report.
• You could inherit six-figure cleanup costs for an unaddressed issue if something is revealed post closing. Even with a clean report, you could still face six-figure cleanup costs later—especially if you’re paying cash, the Phase I misses something, or nearby contamination spreads to your site.

Pro tip: Always order a Phase I ESA during due diligence. If red flags appear, a Phase II may be required. Phase II is where it gets expensive. Ask the seller for prior reports and indemnities.

2. Zoning & Use Violations

Industry Term: Zoning Verification Letter, Certificate of Occupancy

When to Watch for it: During Underwriting + Due Diligence – Verify zoning fit before submitting LOI, confirm fully during Due Diligence.

Why it’s dangerous:

• If your intended use (e.g., medical, short-term rental) isn’t allowed under current zoning, you may face fines or be forced to shut down operations.
• Grandfathered uses may not transfer with the sale depending on the geographic location or if laws have changed since the original seller purchased it.

Pro tip: Request a zoning verification letter from the city or county and confirm use compliance. Get updated COs (Certificate of Occupancy) for all units.

3. Title Issues & Legal Encumbrances

Industry Term: ALTA Title Report, Title Insurance

When to Watch for it: Title Review Period (During Due Diligence) – Title company begins review as soon as contract is signed.

Why it’s dangerous:

• Unexpected liens, easements, or disputes over access can delay closing or reduce property value.
• Unclear ownership structures can expose you to litigation.

Pro tip: Order a full ALTA title report and have your attorney review it. Always ensure the title is clear and insurable. You can order the ALTA title report from a Title Company, Real Estate Attorney, or Escrow Agent.

4. Lease Risk & Tenant Instability

Industry Term: Estoppel Certificates, Lease Audits

When to Watch for it: During Due Diligence (Immediately After PSA) – Review leases, request estoppel certificates early.

Why it’s dangerous:

• A major tenant might have an escape clause or be on shaky financial footing.
• Lease terms may not match what the seller claims.

Pro tip: Get estoppel certificates (written statement from tenants that confirms what the seller told you regarding their lease agreement) from tenants to confirm lease terms. Review all leases and request tenant financials if possible.

5. Deferred Maintenance

Industry Term: Property Condition Report (PCR), Capital Expenditures (CapEx)

When to Watch for it: Before Closing, During Inspection Phase – Schedule PCR and walkthroughs ASAP after contract signed.

Why it’s dangerous:

• Outdated systems (roof, HVAC, plumbing) can result in surprise repairs and unplanned capital expenses.
• Cosmetic updates often mask deeper issues.

Pro tip: Hire a licensed inspector and request a full PCR (Property Condition Report). Budget for CapEx (Capital Expenditures which are the major repairs) based on realistic life expectancy of systems. Make sure you bring an experienced COMMERCIAL MEP team (Mechanical, Electrical, and Plumbing) professionals on your due diligence walkthrough before drafting the PSA (Purchase Sales Agreement).

6. Insurance Surprises

Industry Term: Loss Run Report, Replacement Cost Estimate

When to Watch for it: During Due Diligence (Early to Mid) – Seller should request 3-year loss runs within first week of Due Diligence.

Why it’s dangerous:

• Older buildings or those in disaster-prone areas may have limited or costly insurance options.
• Tenants without proper coverage shift liability to you.

Pro tip: Ask  3-year loss run report. The seller needs to request this from their insurance provider. The broker can also sometimes get access to this as well. Get binding insurance quotes during due diligence. Verify that tenants meet insurance obligations.

7. Financing Shortfall (DSCR & LTV Issues)

Industry Term: Debt Service Coverage Ratio (DSCR), Loan-to-Value (LTV)

When to Watch for it: During Underwriting + Before LOI – Run conservative scenarios before making an offer or applying for financing.

Why it’s dangerous:

• Your underwriting might show strong returns, but lenders use their own conservative models.
• Lower-than-expected loan proceeds can sink your capital stack.

Pro tip: Underwrite your deal at a 1.25x DSCR using lender assumptions for taxes, insurance, and reserves. Confirm interest rate early. And make sure you underwrite using the current rent and occupancy, not the proforma (future or anticipated rates).

8. Market or Location-Based Risks

Industry Term: Neighborhood Demographics, Crime Reports, Retail Void Analysis

When to Watch for it: Pre-LOI (Letter of Intent) + Property Walkthroughs – Visit the neighborhood at odd hours before making an offer.

Why it’s dangerous:

• Surrounding crime, low-income trends, poor performing schools, or lack of walkability can affect occupancy and rent potential.
• Lenders may downgrade area risk even if the asset looks good.

Pro tip: Visit the property during off hours with a second person! Check city crime data, planned developments via the local economic development office), and tenant mix nearby.

9. Lender Term Changes

Industry Term: Commitment Letter, Rate Lock Agreement

When to Watch for it: Between Term Sheet & Closing – Monitor from loan application through funding. Lock terms if possible.

Why it’s dangerous:

• Lenders may reduce loan amounts, raise rates, or back out during volatile markets. They can be tricky too. Some commercial mortgage brokers are known to change (usually increase their fees) right before closing. Or they don’t communicate any lender changes in a timely manner so you don’t have any. This leaves you in a stuck and vulnerable situation and most times the buyer will close because they are so close to the finish line and do not want to start over.
• If you’re relying on a bank (and you have a value add deal), your deal could collapse! Banks prefer not to do small balance commercial real estate loans because they are resource intensive. And they don’t fund value add deals because of risk. Yet, they don’t communicate this. They basically ghost you, sometimes days before closing.

Pro tip: Leverage your favorite commercial mortgage broker (pick me, pick me, lol!) to screen, vet, and source term sheets from multiple lenders and request soft quotes early. Push to lock your rate and terms once approved. Make sure you have reserves for the fees you will incur prior to closing.

10. Operating Expense Surprises

Industry Term: CAM (Common Area Maintenance) Reconciliation, Property Tax Forecast (esp for NNN – Triple Net Leases)

When to Watch for it: During Financial Review in Due Diligence – Review T12s, utility bills, and CAM reconciliations early.

Why it’s dangerous:

• Incomplete or inaccurate expense records (taxes, utilities, special assessments) reduce NOI and returns.
• Buyers often miss fire protection fees, reassessment risk, or hidden utility charges.

IMPORTANT NOTE:

🏛️ Property Tax Reassessment Risk

• After a sale, many municipalities reassess property value — raising property taxes dramatically.

• If leases don’t allow pass-throughs on increased taxes, you eat the cost.

Pro tip: Review 2–3 years of operating statements and CAM (janitorial, parking lot striping, snow removal, etc) reconciliations. This would include fees such as Check with the county for pending assessments or likely tax reassessments.

11. Anchor Tenant Bankruptcy or Lease Termination

Industry Term: Co-Tenancy Clause, Rent Roll Analysis (for NNN Leases)

When to Watch for it: During Lease Review + Estoppels – Look at tenant health and clauses before closing.

Why it’s dangerous:

• Losing a key tenant can trigger rent drops, violate lender covenants, or cause other tenants to exit.
• Tenant bankruptcies can delay collections and lower asset value.

Pro tip: Audit the rent roll and identify concentration risk. Understand lease clauses that tie other tenants to anchors.

12. Flood Zone & Insurance Risk

Industry Term: Flood Certificate, FEMA Zone Map

When to Watch for it: Pre-LOI + Due Diligence – Pull flood cert early in DD, use FEMA tools before offering.

Why it’s dangerous:

• FEMA re-mapping may place a property into a flood zone requiring costly insurance.
• Flood rules can limit renovations or trigger coverage issues.

Pro tip: Order a flood cert early. Confirm insurability and compare quotes before closing.

13. Bad Operating Agreements (for Partnerships)

Industry Term: JV Agreement, Operating Agreement Review

When to Watch for it: Before Deal Launch or Capital Raise – Nail this down before any legal structure is finalized or money is accepted.

Why it’s dangerous:

• Disputes between partners can stall decisions or trigger forced sales.
• Vague or one-sided clauses leave you powerless in a crisis.

Pro tip: Have all JV and syndication agreements reviewed by an attorney. If it’s a syndication, please reach out to a reputable syndication attorney. Clarify capital calls, voting rights, and exit terms before signing.

These landmines don’t just kill deals—they kill reputations and investor trust. Mastering them gives you leverage, authority, and resilience in any market.

Whether you’re buying, refinancing, or partnering up — these landmines are easier to dodge before they explode.

Once you have found a winning deal, be sure to grab our 5 minute funding quiz to make sure your deal is funding ready!

DISCLAIMER: This is not real estate, legal, or financial advice. Please contact your preferred attorney or financial adviser for help specific to your needs or issue.