Looking for real estate? Check the Due Diligence List First – Daily Breeze
Today, let’s talk about due diligence.
Simply put, it’s a time frame for a buyer to investigate a purchase. Generally, there is no obligation to proceed if something untoward is discovered. Also called an emergency period, “free look” or, in some cases, an option, these 30 to 75 day periods are packed with action.
As a buyer of commercial real estate, you will either occupy the premises or simply collect rent from the tenant. Either way, your thinking about buying should revolve around three things: physical, financial, and utilitarian.
Physical aspects are things like the roof, mechanical systems, build quality, title, and age. Financial characteristics include the amount of rent the tenant pays, operating expenses, financing capacity and capitalization rate.
Finally the utility. Can your operation run successfully? Will the property have broad appeal to the next occupant? And what about the location?
You will need to hire consultants to build your due diligence case. If you are lucky, the seller will pass on a good part of the deliverables. Otherwise, you will start from scratch.
My best example: We once made a deal in 15 days. Why? The seller had bought the property a year earlier and was able to send us everything we needed to analyze the purchase.
So, potential buyers, what will you need?
—A physical inspection or condition assessment of the property
—Environmental Phase I – also known as ESA – Environmental Site Assessment
—Mandatory Disclosure Form
—Property Information Sheet
—Soils, geotechnical information
—A preliminary title report
—Assessment – if you are borrowing money
—Information on existing loans – if you are assuming financing
—Plans, permits and approvals
-Revenue and expenditure
—Copies of leases and estoppel certificates
—Financial information on tenants and guarantors
— Utility bills
—Association documents, CC and R
Once all of this is compiled, keep three things in mind when deciding to go ahead and close the deal.
Time limit : Loan approval and the components of that approval (appraisal, environment, finance) take time. In most cases, this is around 45-60 days if you and your lender are in tune and provide your lender with a full set of information for your loan approval.
Make sure your agreement with the seller gives you enough time for your loan approval and that you can extend the time if needed. While your lender calculates the numbers, the appraiser scours the market for comparable sales, the enviro engineer reviews records of previous hazardous uses; you and your team can take care of the rest of the investigation.
Responsibility: Ultimately, the responsibility for analyzing the purchase is yours, but you’ll want to hire a host of consultants to provide you with reports. Your lender will usually hire the appraiser and environmental engineer.
I would suggest that you have a commercial building inspector check the building. You will probably want your attorney to review the title report and discuss with you which ownership entity is most beneficial to you.
If you are considering making changes to the building, the advice of an architect is invaluable. The architect can also help you with city permits and ADA travel issues. Building these new offices or adding a truck loading dock will require a licensed general contractor. Team up with one early on – perhaps have the contractor check the condition of the building for you as well as the commercial inspector.
Appeal: Typically, you do your due diligence – loan, property condition, title, license, etc. – and conclude whether or not you are ready for launch.
Make sure your agreement allows you to cancel the sale, free of charge, if something goes wrong such as the property is environmentally contaminated, cannot be financed, costs too much to improve, or the city won’t let you not to occupy the building for your use.
Allen C. Buchanan, SIOR, is a principal at Lee & Associates Commercial Real Estate Services in Orange. He can be reached at [email protected] or 714.564.7104.