What is shadow space and why does it matter for office due diligence?

Shadow space is square footage a tenant is subleasing or has vacated but still pays full rent on to the landlord. It doesn't affect current NOI, but it's a leading indicator that the tenant will downsize or vacate at renewal; always search sublease listings for every major tenant, not just the rent roll.

How do you calculate the TI/LC liability in an office acquisition?

Build the full rollover schedule across the hold period, estimate TI and leasing commission cost per square foot for each expiring suite (typically $50-90/SF full-service, less for renewals than new leases), and compare the total to reserved capital. A gap in any single year is a capital call risk, not just a modeling footnote.

What's an acceptable tenant credit concentration for institutional office?

Most institutional buyers target no single tenant above 25-35% of building income and no top-3 concentration above 50%. Concentration above that, especially paired with a WALT under 3-4 years, means the asset's cash flow depends on one or two renewal decisions rather than a diversified tenant base.

How long does real estate due diligence take?

30–60 days is typical for institutional commercial assets. Multi-property portfolios run longer.

Who performs real estate due diligence?

Typically the acquisitions team quarterbacks, with specialists pulled in for environmental, title, zoning, and legal review.

Office · Due Diligence Checklist

Office Due Diligence Checklist

Office due diligence checklist for institutional acquisitions: sublease shadow space, TI/LC burn, WALT and credit concentration audits. Free template.

Get the Excel template Automate it with Moraine

Why the due diligence checklist looks different for office

Office occupancy on a rent roll can be materially misleading because tenants sublease space without necessarily reducing their headline rent obligation to the landlord. A tenant paying full rent on paper can have 60% of its footprint dark or subleased below market, shadow space that doesn't show up until diligence pulls sublease filings and building access logs.

TI and leasing commission burn compounds every rollover in office in a way retail and industrial rarely see at the same intensity. Full-service office TI packages run $50-$90/SF for second-generation space, and every renewal or backfill draws down capital that isn't reflected in in-place NOI. The unfunded TI/LC liability has to be underwritten across the entire rollover schedule rather than year one alone.

Full-service gross leases carry base-year expense stops and gross-up provisions that shift expense risk unpredictably as occupancy changes. A building leasing up from 70% to 95% occupied sees operating expenses per square foot swing in ways NNN leases never do. The gross-up math has to be modeled tenant-by-tenant; the T-12 can't be read at face value.

The office-specific checklist

1

Confirm title is clean

Verify: title commitment, policy exceptions, recorded liens
2

Reconcile rent roll to executed leases

Verify: rent, expiration, deposit, and options match each lease 1:1
3

Tie rent roll to T-12 general ledger

Verify: three months of GL tie to within 1% of rent roll totals
4

Review property condition assessment (PCA)

Verify: deferred maintenance budgeted and reflected in the pro forma
5

Review Phase I environmental report

Verify: no REC, no HREC, no CREC without remediation plan
6

Review zoning and entitlements

Verify: current use is a permitted use; no pending rezoning
7

Confirm tax status

Verify: tax bills paid current, no special assessments pending
8

Audit operating expenses

Verify: three-year trend; flag any single-line change >10% YoY
9

Pull the current stacking plan and reconcile every suite to a signed lease

Verify: no vacant or dark suites represented as occupied; confirm suite-by-suite square footage against the rent roll
10

Search for sublease listings and broker filings for every major tenant

Verify: any tenant subleasing more than 20% of its space, and at what discount to its own contract rent, shadow space signals a coming vacancy
11

Build the full TI/LC rollover schedule for the next 5 years

Verify: unfunded TI/LC liability by year against reserve on hand; flag any year where scheduled rollover TI exceeds 18 months of that suite's NOI
12

Recalculate base-year expense stops and gross-up methodology for each full-service lease

Verify: stop year and gross-up percentage (typically 95%) applied consistently; flag any lease using a gross-up above 100% or an outdated base year
13

Calculate weighted average lease term (WALT) and credit concentration by tenant

Verify: top 3 tenants' share of total base rent; flag any single tenant above 25% of building income
14

Verify parking ratio and reserved-space allocations against the lease abstracts

Verify: ratio matches marketing materials (typically 3.0-4.0/1,000 SF for suburban office); confirm no over-allocation of reserved spaces beyond garage capacity

Metrics that matter for office

Metric	Target	Calculation
Sublease shadow space ratio	<10% of leased SF	sublet SF across all tenants / total leased SF
TI/LC funding ratio	>100%	reserved TI/LC capital / 5-year rollover schedule liability
Credit concentration (top 3 tenants)	<50% of base rent	sum of top 3 tenants' annual base rent / total building base rent
Net effective rent	≥80% of face rent	(face rent × term - TI - free rent value) / term
WALT (yrs)	>5 for core	weighted avg remaining lease term
Occupancy	>90% for core	leased SF / rentable SF

Red flags unique to office

A major tenant subleasing more than 30% of its space at a discount to its own rent

the tenant is signaling it doesn't need the space at renewal, the sublease discount previews the rent reset the landlord will face when the head lease rolls
Unfunded TI/LC liability exceeding 18 months of NOI for a single suite's rollover year

the capital hasn't been reserved and will come directly out of distributable cash flow or a capital call in that rollover year
Top tenant concentration above 35% of building base rent with WALT under 3 years

the building's income is one lease renewal away from a material vacancy, and re-leasing full-service office space now runs 9-18 months
Net effective rent more than 15% below face rent

high TI + free rent burns more of stated rent than the pro forma assumes
Rollover concentration above 30% in any single year

single-year rollover exposure in a soft office market is the dominant underwriting risk
Sublease availability exceeding 10% of market stock

tenants are offloading space — direct rents will follow down
Operating expense pass-through base year inconsistency

mismatched base years mean recoveries don't actually protect landlord

Example — office due diligence checklist walkthrough

The subject is a 210,000-square-foot Class A office building in a secondary CBD at $52.5M: $250 per square foot on a 7.1% cap rate against $3.73M of T-12 NOI. The rent roll shows 91% leased with a 6.8-year WALT, anchored by a 62,000-square-foot law firm on a full-service lease representing 34% of building income. The offering memorandum presents the tenant base as stable and the occupancy as durable.

The stacking plan reconciliation is clean; every suite ties to a signed lease. The sublease search is not. The anchor law firm has listed 28,000 square feet, roughly 45% of its footprint, for sublease at $22/SF against its own contract rent of $34/SF, and none of it shows on the rent roll. The firm is still paying full rent to the landlord today, so current NOI is unaffected, but the discount and the scale of the sublease signal the firm intends to right-size at its 2029 renewal. The deal's largest income source is effectively on notice three years early, before any renewal negotiation has formally opened.

Then there is the TI/LC rollover schedule. Built five years out against the reserve on hand, it shows 2028 carrying $1.8M of scheduled TI/LC for three mid-size tenants rolling that year, against only $650,000 currently reserved, a $1.15M funding gap arriving two years before the anchor's own renewal decision.

The gross-up check on the anchor's lease finds the expense stop calculated off a 2019 base year with a 95% gross-up, both within norms, so that piece checks out clean and the reimbursement line carries through the model unchanged. The shadow space and the TI funding gap leave the buyer unable to treat the anchor's 34% income share as durable through the hold, and the 2028 capital call has to be reserved for explicitly rather than assumed away. This deal settled at a $2.4M price reduction plus a seller-funded TI escrow sized to the 2028 gap, with the anchor's 2029 renewal flagged as the hold's central risk event.