Tuesday, February 16, 2010

Due Diligence

As you promote, sell and then document the property transaction you will soon come across the fact and event of ‘due diligence’.

This element of the commercial real estate sale is very common and will be the subject of most contracts with the exception of the auction method.

As you would expect the process of due diligence can make or break a sale. For this reason it is wise to question a seller well in the listing stage of the sale to ensure that no ‘deal breakers’ or problems are hidden in the cupboard. Due diligence will likely find most problems on and with the property.

So what can be looked at in ‘due diligence’? Consider these:
  • Due Diligence is simply a detailed checking process that is undertaken prior to sale and settlement by ‘experts’, to review all relevant data involved in the sale.
  • Usually solicitors and/or audit specialists are the nominated parties to undertake the work on behalf of the purchaser.
  • The concept of Due Diligence is that the sale and settlement of the property will only occur if the Due Diligence process is successful.
  • On large commercial properties it is not unusual for Due Diligence to continue for days if not weeks. A special condition of the contract will allow this to occur.
  • The process is undertaken under the strict control of the Seller. It usually occurs in the Seller’s property management office or at the Sellers solicitor’s offices, and is usually in a controlled environment (locked room). Only authorized parties are allowed into the room so as to preserve security and confidentiality of documentation.
  • A good Agent or Broker will provide total support to the Due Diligence activity. Expect Due Diligence to check just about everything involved in the sale.

The five professional areas usually covered are:-

  • Engineering
  • Environment
  • Finance
  • Legal
  • Management

Expect questioning and document discovery to include the following:-

  • Engineering: Includes verification that the property structures and building services comply with the Building Code of Australia and Local Government building Approvals. Questions will cover safety risks or non-compliance of structures, fire protection, air conditioning, electrical supply, hydraulics, lifts, escalators, and stand-by emergency power. Expect the questions to involve adequacy of structures, mandatory service compliance, remaining life expectancy, capital expenditure, and sinking fund requirements for future major repairs or replacements.
  • Environment: Includes a wide range of issues such as identification and analysis of environmental and physical risks to the property or land and its use. Issues will include site contamination, dangerous goods and hazardous substances, asbestos, hazardous industrial waste, trade waste, storm water management, occupational health and safety, heritage factors, and statutory requirements.
  • Finance: Includes all actions and dealings associated with property financing, review of taxation implications, substantiation of income and expenditure statements, arranging mortgages, financial analysis and modelling, company or entity investigations, plus all other supportive or related documentation.
  • Legal: Includes all conveyance documentation, easements, permits, titles, contracts, leases, searches, incentives to tenants, site details, compliance with any legislative requirements, outstanding litigation, and any town planning issues.
  • Management: Looks at any issues associated with ongoing asset management, facilities management, building management, lease management and negotiation, rent collection, arrears, financial reporting, insurance, car-park supervision, cleaning, pest control, landscaping etc.