Friday, June 8, 2012

Due Diligence Strategies and Tips for Commercial Real Estate Agents

high rise office buildings
Due diligence is part of Commercial Real Estate Sales and Leasing

The due diligence process in commercial property today is a common event when it comes to sales, leasing, and new property development.  Here are some tips from our Newsletter for Commercial Agents.

The due diligence process is essentially a checking system to ensure that the property is everything that the landlord and or agent claim.  Buyers, tenants, or property investors will look to do a due diligence as part of getting involved with a property.

Expect it to Happen!

Existing property owners looking to create a contract or a lease should expect a thorough due diligence process on the part of the property purchaser or tenant.  These parties will look at the property comprehensively and thoroughly to ensure that it is everything it is claimed to be, and that it can serve them successfully as part of the transaction they require.

It is very common for solicitors to get involved in the due diligence process and facilitate the activity subject to the existing contract or lease documentation.  Other experts can also be involved such as engineers, architects, and other property specialists.  These groups and or people are there to identify the correctness or shortcomings within the property given the expectations of the parties to the transaction and the documents created.

Each property will always be unique and have particular attributes that require comprehensive study and review.  On that basis the due diligence process can be quite thorough and take a number of days if not weeks for completion.  The larger the property, the longer it takes.

Here are some of the main items identified and reviewed as part of this:

  1. The ownership title for the property will immediately give the base information to get started.  There may also be necessary identity checks, and company searches required on the property owners.
  2. From the ownership title, plans relating to surveys, building construction and local planning regulations can then be obtained.  The local planning regulations will have some impact on the usage of the property.
  3. The survey plans will help the parties understand the proximity of the physical property to the legal boundaries detailed on the survey.  When in doubt, a property surveyor should be sourced to peg the corners of the property.
  4. Factors of building construction may be relative to property usage today or for future development.  You may need an engineer or an architect for this process.  The types of improvements and the stability of the structure would be subjected to study.
  5. The original approvals and notices served on the property at time of construction should be sourced and identified.  They will have relevance to the usage of the property today.  There may also be other plans and notices issued on the property since the time of construction.  This information should be sourced from the local building approvals office.
  6. Whilst every property will have some form of title and ownership, there may also be other documents associated with property usage.  They can be in the form of easements, encumbrances, rights of way, and other documents relating to an interest or involvement with others.  Importantly the relationships have to be identified and determined.
  7. Property performance and occupation can be impacted significantly through occupancy permits and certificates.  Any documentation in this regard should be sourced.  The property should be approved for the purpose it is put to.
  8. The insurance on the property may have impact on property usage, the tenancy mix, and the leases.  When in doubt, ask questions and read the leases regards insurance.  At time of contract and later sale the insurance and risk in the property can shift or change; always read the contract so the parties to the transaction know their risk position.
  9. The leases within the property may have impact on property usage, tenancy mix, or future sale.  The leases would normally be discoverable as part of the due diligence process.  The leases may also have some associated documentation in various forms that will need to be sited and reviewed.  When in doubt see a good solicitor to help with this.
  10. The operational costs of the building are normally referred to as outgoings.  They will have impact on the net income for the property as well as the leases and the tenancy mix.  It pays to look at the outgoings as they currently apply to the building cash flow, as well as the history of outgoings over recent time.  A review of outgoings should always remove capital items as these are handled separately outside of the normal day to day cash flow within the building.
  11. The property compliance to the rules and regulations relating to essential services will always be important.  Essentially the property needs to comply with all those rules and regulations relating to the local development plan, building function, and property usage.
  12. Many buildings will have some special factors to consider such as native title, heritage, or the environment.  These factors can then have flow through to the way in which the property is used by the tenants, or owned by the property owner.  Details of these items should be investigated and be made discoverable.  See if any orders or notices are outstanding in this regard.
  13. At time of property sale, any matters of litigation, risk, or threat may also be important to the due diligence process.  When in doubt ask questions and appropriately disclose or source out the accurate information.

It should be said that we are not all experts in everything when it comes to commercial or retail property.  The due diligence process needs to be quite thorough and accurate.  On that basis it is appropriate to involve experts in all the disciplines required.

The list above it is not finite but it will give you an idea of the thoroughness of the due diligence process.  Depending on your relationship to the property and the process, be prepared for the matters to be fully investigated; everything and anything can evolve from the due diligence process.

Need some more tips for Commercial Real Estate Agents?  Get our Newsletter here.