Today we are going to talk about due diligence.
Simply put, this is a period of time allotted for a buyer to study a purchase. Generally, there is no obligation to proceed if something untoward is discovered. Also called a contingency period, a “free look” or, in some cases, an option, these 30-75 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. Regardless, your purchase consideration should revolve around three things: physical, financial, and utility.
The physical aspects are things like the roof, mechanical systems, build quality, title and age. Financial characteristics include the amount of rent paid by the tenant, operating expenses, financing capacity and capitalization rate.
Finally the utility. Can your operation run successfully? Will the property have broad appeal to the next occupier? And what about location?
You will need to hire some consultants to build your due diligence package. If you’re lucky, the seller will spend a good portion of the delivered products. Otherwise, you’ll be starting from scratch.
My best example: We once closed a deal in 15 days. Why? The seller had purchased the property a year prior and was able to send us everything we needed to analyze the purchase.
So, potential buyers, what will they need?
-A physical inspection or an assessment of the state of the property
—Environmental phase I – also known as ESA – environmental assessment of the site
– Mandatory disclosure form
– Property information sheet
—Soils, geotechnical information
– A preliminary title report
—Assessment: if you are borrowing money
— Information on the existing loan, if you are taking on financing
– Zoning report
-Plans, permits and approvals
-Income and expenses
– Rental roll
– Copy of lease contracts and certificates of exclusion
— Financial information of tenants and guarantors
– Pending litigation
– Seismic research
– Public utility bills
—Association documents, CC and Rs
Once all of these have been compiled, keep three things in mind when deciding to go ahead and complete the transaction.
Time periods: Loan approval and the components of that approval (appraisal, environmental and financial) take time. In most cases, it’s about 45-60 days if you and your lender are in sync and provide your lender with a complete package of information for your loan approval.
Make sure your agreement with the seller allows you adequate time for your loan to be approved and that you can extend the term if necessary. While your lender is crunching the numbers, the appraiser is scouring the market for comparable sales, the environmental engineer is reviewing past hazardous use records; you and your team can get busy taking stock of the investigation.
Responsibility: Ultimately, the responsibility for analyzing the purchase is yours, but you’ll want to hire a group of consultants to provide you with reports. Your lender will usually hire the appraiser and the environmental engineer.
I would suggest having a commercial building inspector look over the building. You will probably want your attorney to review the title report and discuss with you the most advantageous ownership entity for you.
If you are planning to make changes to the building, the guidance of an architect is invaluable. The architect can also help you with city permits and ADA travel issues. Building those new offices or adding a truck loading dock will require a licensed general contractor. Team up with one before: Maybe have the contractor check the condition of the building for you, as well as the commercial inspector.
Resource: Typically, you do your due diligence (loan, property condition, title, permits, etc.) and decide whether or not you’re ready to launch.
Make sure your agreement allows you to cancel the sale, free of charge, if something goes wrong, like the property is environmentally contaminated, can’t be financed, is too expensive to improve, or the city won’t let you occupy the building with your use . .
Allen C. Buchanan, SIOR, is a principal at Lee & Associates Commercial Real Estate Services in Orange. He can be reached at firstname.lastname@example.org or 714.564.7104.
On the hunt for property? Check the due diligence list first – Press Telegram Source link On the hunt for property? Check the due diligence list first – Press Telegram