Do you know about - Due Diligence Checklists - For market Real Estate Transactions
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A Key to investing in commercial real estate is performing an enough Due Diligence Investigation to assure you know all material facts to make a wise speculation decision and to reckon your anticipated speculation yield.
The following checklists are designed to help you escort a focused and meaningful Due Diligence Investigation.
Basic Due Diligence Concepts:
Commercial Real Estate transactions are Not similar to large home purchases.
Caveat Emptor: Let the Buyer beware.
Consumer protection laws applicable to home purchases seldom apply to commercial real estate transactions. The rule that a Buyer must examine, judge, and test for himself, applies to the buy of commercial real estate.
Due Diligence: "Such a measure of prudence, activity, or assiduity, as is proper to be anticipated from, and ordinarily exercised by, a uncostly and thrifty [person] under the single circumstances; not measured by any absolute standard, but depending upon the relative facts of the extra case." Black's Law Dictionary; West Publishing Company.
Contractual representations and warranties are Not a substitute for Due Diligence.
Breach of representations and warranties = Litigation, time and money.
What Diligence Is Due?
The scope, intensity and focus of any due diligence investigation of commercial or commercial real estate depends upon the objectives of the party for whom the investigation is conducted. These objectives may vary depending upon either the investigation is conducted for the advantage of (i) a Strategic Buyer (or long-term lessee); (ii) a Financial Buyer; (iii) a Developer; or (iv) a Lender.
If you are a Seller, understand that to close the transaction your Buyer (and its Lender) must address all issues material to its objective - some of which require facts only you, as Owner, can adequately provide.
General Objectives:
(i) A "Strategic Buyer" (or long-term lessee) is acquiring the asset for its own use and must verify that the asset is suitable for that intended use.
(ii) A "Financial Buyer" is acquiring the asset for the anticipated return on speculation generated by the property's revenue stream, and must resolve the amount, velocity and durableness of the revenue stream. A sophisticated Financial Buyer will likely reckon its yield based upon discounted cash-flows rather than the must less strict capitalization rate ("cap rate"), and will need enough financial facts to do so.
(iii) A "Developer" is seeking to add value by changing the character or use of the asset - ordinarily with a short-term to intermediate-term exit strategy to dispose of the property; although, a Developer might plan to hold the asset long term as Financial Buyer after development or redevelopment. The Developer must focus on either the planned turn is character or use can be concluded in a cost-effective manner. A developer conducting due diligence will focus on issues interesting market demand, access, use and finances.
(iv) A "Lender" is seeking to compose two basic lending criteria:
1. "Ability to Repay" - The potential of the asset to generate enough revenue to repay the loan on a timely basis; and
2. "Sufficiency of Collateral" - The objective disposal value of the collateral in the event of a loan default, to assure enough funds to repay the loan, carrying costs and costs of variety in the event forced variety becomes necessary.
The whole of diligent inquiry due to be expended (i.e. "Due Diligence") to explore any single commercial or commercial real estate task is the whole of inquiry required to rejoinder each of the following questions to the extent relevant to the objectives of the party conducting the investigation:
I. The Property:
1. Exactly what asset does Purchaser believe it is acquiring?
(a) Land?
(b) Building?
(c) Fixtures?
(d) Other Improvements?
(e) Other Rights?
(f) The entire fee title interest along with all air possession and subterranean rights?
(g) All development rights?
2. What is Purchaser's planned use of the Property?
3. Does the corporal condition of the asset permit use as planned?
(a) Commercially enough entrance to public streets and ways?
(b) enough parking?
(c) Structural condition of improvements?
(d) Environmental contamination?
(i) Innocent Purchaser defense vs. Exemption from liability
(ii) All approved Inquiry
4. Is there any legal restriction to Purchaser's use of the asset as planned?
(a) Zoning?
(b) underground land use controls?
(c) Americans with Disabilities Act?
(d) Availability of licenses?
(i) Liquor license?
(ii) Entertainment license?
(iii) Outdoor dining license?
(iv) Drive through windows permitted?
(e) Other impediments?
5. How much does Purchaser expect to pay for the property?
6. Is there any condition on or within the asset that is likely to increase Purchaser's sufficient cost to collect or use the Property?
(a) asset owner's assessments?
(b) Real estate tax in line with value?
(c) extra Assessment?
(d) Required user fees for critical amenities?
(i) Drainage?
(ii) Access?
(iii) Parking?
(iv) Other?
7. Any encroachments onto the Property, or from the asset onto other lands?
8. Are there any encumbrances on the asset that will not be cleared at Closing?
(a) Easements?
(b) Covenants Running with the Land?
(c) Liens or other financial servitudes?
(d) Leases?
9. Leases?
(a) protection Deposits?
(b) Options to extend Term?
(c) Options to Purchase?
(d) possession of First Refusal?
(e) possession of First Offer?
(f) Maintenance Obligations?
(g) Duty on Landlord to provide utilities?
(h) Real estate tax or Cam escrows?
(i) Delinquent rent?
(j) Pre-Paid rent?
(k) Tenant mix/use controls?
(l) Tenant exclusives?
(m) Tenant parking requirements?
(n) self-acting subordination of Lease to hereafter mortgages?
(o) Other material Lease terms?
10. New Construction?
(a) Availability of building permits?
(b) Utilities?
(c) Npdes (National Pollutant extraction Elimination System) Permit?
(i) Phase 2 sufficient March 2003 - Permit required if earth is disturbed on one acre or more of land.
(ii) If applicable, Storm Water Pollution arresting Plan (Swppp) is required.
Ii. The Seller:
1. Who is the Seller?
(a) Individual?
(b) Trust?
(c) Partnership?
(d) Corporation?
(e) miniature Liability Company?
(f) Other legally existing entity?
2. If other than natural person, does jobber validly exist and is jobber in good standing?
3. Does the jobber own the Property?
4. Does jobber have authority to convey the Property?
(a) Board of Director Approvals?
(b) Shareholder or Member approval?
(c) Other consents?
(d) If foreign private or entity, are any extra requirements applicable?
(i) Qualification to do company in jurisdiction of Property?
(ii) Federal Tax Withholding?
(iii) Us Patriot Act compliance?
5. Who has authority to bind Seller?
6. Are sale proceeds enough to pay off all liens?
Iii. The Purchaser:
1. Who is the Purchaser?
2. What is the Purchaser/Grantee's exact legal name?
3. If Purchaser/Grantee is an entity, has it been validly created and is it in good standing?
(a) Articles or Incorporation - Articles of Organization
(b) Certificate of Good Standing
4. Is Purchaser/Grantee authorized to own and control the asset and, if applicable, finance acquisition of the Property?
(a) Board of Director Approvals?
(b) Shareholder or Member approval?
(c) If foreign private or entity, are any extra requirements applicable?
(i) Qualification to do company in jurisdiction of the Property?
(ii) Us Patriot Act compliance?
(iii) Bank Secrecy Act/Anti-Money Laundering compliance?
5. Who is authorized to bind the Purchaser/Grantee?
Iv. Purchaser Financing:
A. company Terms Of The Loan:
What loan terms have the Purchaser, as Borrower, and its Lender agreed to?
(a) What is the whole of the loan?
(b) What is the interest rate?
(c) What are the reimbursement terms?
(d) What is the collateral?
(i) commercial real estate only?
(ii) Real estate and personal asset together?
(e) First lien? A junior lien?
(f) Is it a single develop loan?
(g) A multiple develop loan?
(h) A building loan?
(i) If it is a multiple develop loan, can the critical be re-borrowed once repaid prior to maturity of the loan; manufacture it, in effect, a revolving line of credit?
(j) Are there sustain requirements?
(i) Interest reserves?
(ii) heal reserves?
(iii) Real estate tax reserves?
(iv) guarnatee reserves?
(v) Environmental remediation reserves?
(vi) Other reserves?
(k) Are there requirements for Borrower to open company operating accounts with the Lender? If so, is the Borrower obligated to enunciate minimum compensating balances?
(l) Is the Borrower required to pledge company accounts as further collateral?
(m) Are there early reimbursement fees or yield maintenance requirements (each sometimes referred to as "pre-payment penalties")?
(n) Are there reimbursement blackout periods during which Borrower is not permitted to repay the loan?
(o) Is there a Loan Commitment fee or "good faith deposit" due upon Borrower's acceptance of the Loan Commitment?
(p) Is there a loan funding fee or loan brokerage fee or other loan fee due Lender or a loan broker at closing?
(q) What are the Borrower's cost reimbursement obligations to Lender? When are they due? What is the Borrower's enforcement to pay Lender's expenses if the loan does not close?
B. Documenting The commercial Real Estate Loan
Does Purchaser have all facts critical to comply with the Lender's loan windup requirements?
Not all loan documentation requirements may be known at the outset of a transaction, although most commercial real estate loan documentation requirements are fairly typical. Some required facts can be obtained only from the Seller. Production of that facts to Purchaser for delivery to its lender must be required in the buy contract.
As advice to what a commercial real estate lender may require, the following sets forth a typical windup Checklist for a loan secured by commercial real estate.
Commercial Real Estate Loan windup Checklist
1. Promissory Note
2. Personal Guaranties (which may be full, partial, secured, unsecured, payment guaranties, variety guaranties or a variety of other types of guarantees as may be required by Lender).
3. Loan trade (often incorporated into the Promissory Note and/or Mortgage in lieu of being a cut off document)
4. Mortgage [sometimes vast to be a Mortgage, protection trade and Fixture Filing]
5. Assignment of Rents and Leases
6. protection Agreement
7. Financing Statement (sometimes referred to as a "Ucc-1", or "Initial Filing")
8. Evidence of Borrower's Existence In Good Standing; including
(a) Certified copy of organizational documents of borrowing entity (including Articles of Incorporation, if Borrower is a corporation; Articles of assosication and written Operating Agreement, if Borrower is a miniature liability company; Certified copy of trust trade with all amendments, if Borrower is a land trust or other trust; etc.)
(b) Certificate of Good Standing (if a corporation or Llc) or Certificate of Existence (if a miniature partnership) or Certificate of Qualification to Transact company (if Borrower is an entity doing company in a State other than its State of formation)
9. Evidence of Borrower's Authority to Borrow; including
(a) a Borrower's Certificate;
(b) Certified Resolutions
(c) Incumbency Certificate
10. Satisfactory Commitment for Title guarnatee (which will typically require, for diagnosis by the Lender, copies of all documents of report appearing on schedule B of the title commitment which are to remain after closing), with required commercial title guarnatee endorsements, often including:
(a) Affirmative Creditors possession Endorsement (extending coverage over policy exclusion 7 and policy exclusions 3(a) and 3(d) as they review to creditor's possession matters)
(b) Alta 3.1 Zoning Endorsement modified to include parking
(c) Alta wide Endorsement 1
(d) Location Endorsement (street address)
(e) entrance Endorsement (vehicular entrance to public streets and ways)
(f) Contiguity Endorsement (the insured land comprises a single parcel with no gaps or gores)
(g) Pin Endorsement (insuring that the identified real estate tax permanent index numbers are the only applicable Pin numbers affecting the collateral and that they review solely to the real asset comprising the collateral)
(h) Usury Endorsement (insuring that the loan does not violate any prohibitions against inordinate interest charges)
(i) other title guarnatee endorsements applicable to protect the intended use and value of the collateral, as may be considered upon review of the Commitment for Title guarnatee and inspect or arising from the existence of extra issues pertaining to the transaction or the Borrower.
11. Current Alta inspect (3 sets), [typically ready in accordance with 2005 Minimum approved information for Alta/Acsm Land Title Surveys, certified to the lender, Buyer and the title insurer, along with items 1 through 4, 6, 7(a), 7(b)(1), 8 through 11(a) and 14 from the Surveyor's "Optional inspect Responsibilities and Specifications" referred to as "Table A"].
12. Current Rent Roll
13. Certified copy of all Leases (3 sets)
14. Lessee Estoppel Certificates
15. Lessee Subordination, Non-Disturbance and Attornment Agreements [sometimes referred to plainly as "Sndas"].
16. Ucc, Judgment, Pending Litigation, Bankruptcy and Tax Lien crusade Report
17. Estimate (must comply with Title Xi of Firrea (Financial Institutions Reform, recovery and enforcement Act of 1989, as amended)
18. Environmental Site Estimate report (sometimes referred to as Environmental Phase I and/or Phase 2 Audit Reports)
19. Environmental Indemnity trade (signed by Borrower and guarantors)
20. Site Improvements Inspection Report
21. Evidence of Hazard guarnatee naming Lender as the Mortgagee/Lender Loss Payee; and Liability guarnatee naming Lender as an "additional insured" (sometimes listed as plainly "Acord 27 and Acord 25, respectively)
22. Legal plan of Borrower's Attorney
23. Prestige Underwriting documents, such as signed tax returns, asset operating statements, etc. As may be specified by Lender
24. Compliance trade (sometimes also called an Errors and Omissions Agreement), whereby the Borrower agrees to correct, after closing, errors or omissions in loan documentation.
It is useful to become customary with the Lender's loan documentation requirements as early in the transaction as practical. The requirements will likely be set forth with some information in the lender's Loan Commitment - which is typically much more detailed than most loan commitments issued in residential transactions.
Conducting the Due Diligence Investigation in a commercial real estate transaction can be time interesting and costly in all events.
If the loan requirements cannot be satisfied, it is good to make that estimation during the contractual "due diligence period" - which typically provides for a so-called "free out" - rather than at a later date when the earnest money may be at risk of forfeiture or when other liability for failure to close may attach.
Conclusion
Conducting an sufficient due diligence investigation in a commercial real estate transaction to inspect all material facts and conditions affecting the asset and the transaction is of critical importance.
Unlike owner busy residential real estate, when a house can nearly all the time be busy as the purchaser's home, commercial real estate acquired for company use or for speculation is impacted by numerous factors that may affect its use and value.
The existence of these factors and their affect on a Purchaser's potential to use the asset for its intended use and on the Purchaser's projected speculation yield can only be discovered through diligent investigation and attentiveness to detail.
The circumstances of each transaction will resolve what degree of diligence is required. The level of diligence required under the circumstances is the diligence that is due.
Exercise Due Diligence.
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