10 Red Flags to Watch Out for Before Buying Commercial Property

Investing in commercial property carries substantial financial opportunity—but it also comes with inherent risks. This article outlines ten critical red flags to be aware of before purchasing a commercial asset, with a specific lens on emerging submarkets like commercial real estate in North Hollywood.

1. Incomplete or Inconsistent Financial Documentation

Accurate, comprehensive financial statements are the foundation for evaluating any commercial investment. Missing or inconsistent rent rolls, profit and loss statements, and expense histories should raise immediate concern. These gaps may signal disorganized management, tenant instability, or even deliberate misrepresentation.

According to the National Association of Realtors (NAR), incomplete financial data was cited as a top-5 risk by 63% of commercial real estate investors in their 2024 Outlook Report.

Investors are advised to request a minimum of three years of financial records, verified against tax returns and third-party property management software outputs. Unexplained variances in reported occupancy versus collected rents should be scrutinized closely.

2. High Tenant Turnover or Unstable Lease Structures

Short-term leases or frequent tenant transitions may point to deeper structural or operational problems. Month-to-month agreements increase risk exposure, particularly in a volatile economy.

An analysis by CBRE indicates that stabilized occupancy above 90% with lease maturities staggered over 3–5 years tends to correlate with lower default risk and better lender terms.

Before proceeding, investors should review all active lease agreements and request an aged receivables report. Tenancy interviews, when permitted, can also reveal concerns not captured in financial documents.

3. Deferred Maintenance and Undisclosed Capital Needs

Surface-level improvements often mask hidden deficiencies in critical systems. Roofing, plumbing, HVAC, and electrical systems should be thoroughly inspected. The cost of remedying deferred maintenance can erode cash flow and impair long-term value.

In one North Hollywood case, a buyer acquired a mixed-use building with freshly painted interiors—only to later discover extensive mold behind the drywall due to an outdated plumbing stack.

A certified property condition assessment (PCA) can identify these issues in advance, enabling proper escrow negotiations.

4. Zoning Conflicts and Code Violations

Failure to align a property's current use with its zoning designation can trigger enforcement actions, lease terminations, or halted renovations. Properties with unpermitted improvements or illegal tenant uses are particularly vulnerable.

Using city planning tools such as Los Angeles' ZIMAS portal, investors can verify zoning classifications and ensure all Certificates of Occupancy are valid. Consulting a land-use attorney is recommended in cases of uncertainty.

5. Non-Standard or Risky Lease Terms

Lease agreements form the legal and financial backbone of commercial real estate. Gross leases, early termination clauses, or inconsistent expense pass-throughs may compromise income predictability.

Triple-net (NNN) leases with defined annual escalations and strong-credit tenants are preferred. Ensure clarity on CAM reconciliations, renewal rights, and subletting provisions before acquisition.

6. Overpriced Listings Not Supported by Net Operating Income (NOI)

Some listings command premium pricing based on pro forma projections rather than trailing income data. Without a strong NOI, cap rate compression becomes unjustifiable and financing more difficult.

Key signals of overvaluation include:

• Asking price exceeding comps by 15% or more

• Cap rates underperforming the submarket average

• NOI reliant on temporary or one-time revenue sources

Third-party appraisal and underwriting support are essential to validate price-to-income alignment.

7. Environmental Contamination or Hazards

Environmental risks such as asbestos, lead-based paint, or underground storage tanks can trigger remediation mandates and liability exposure.

A Phase I Environmental Site Assessment (ESA), often required by commercial lenders, identifies potential concerns. Where red flags are found, a Phase II ESA involving soil and groundwater testing may follow.

CERCLA protections do exist for buyers who demonstrate due diligence, making documentation critical.

8. Weak Location Fundamentals Despite Asset Quality

A well-maintained asset in a struggling neighborhood may underperform due to macroeconomic trends, crime rates, or inadequate infrastructure.

In commercial real estate in North Hollywood, investors benefit from robust public transit access, arts district growth, and consistent in-migration of creative industry tenants. However, pockets of underperformance persist just blocks away.

Review city planning initiatives, employment growth, and competing pipeline projects to gauge location resilience.

9. Legal Encumbrances and Title Issues

Pending litigation, unresolved liens, or complicated easement agreements can delay closing or jeopardize long-term operations. Lenders often require clean title insurance before issuing funds.

A preliminary title report, reviewed by a qualified real estate attorney, is a non-negotiable step. Boundary surveys should be commissioned in cases where fencing, shared driveways, or encroachments are suspected.

10. Non-Cooperative or Evasive Sellers

A seller’s unwillingness to share documentation, grant property access, or respond to due diligence requests should not be ignored. These behaviors may conceal material defects or performance issues.

Experienced brokers recommend documenting all communication and insisting on clear due diligence timelines within the purchase agreement. Walking away is often the most prudent decision when transparency breaks down.

Regional Implications: Commercial Real Estate

North Hollywood continues to evolve as a dynamic hub for creative, mixed-use, and transit-oriented development. Yet its fast-changing landscape also invites speculative pricing, regulatory bottlenecks, and increased competition.

Understanding these red flags within the local context empowers investors to navigate the risks of commercial real estate in North Hollywood while capitalizing on its long-term upside.

Final Considerations

Before finalizing any commercial real estate acquisition, comprehensive due diligence is essential. Investors should consult with qualified professionals across legal, environmental, engineering, and financial disciplines.

Avoiding these ten red flags can mean the difference between a high-performing asset and a long-term liability.

Sources:

• National Association of Realtors (NAR) 2024 Commercial Outlook

• CBRE U.S. Real Estate Market Outlook 2024

• Los Angeles City Planning – ZIMAS

• U.S. Environmental Protection Agency – CERCLA Guidelines