When it comes to commercial real estate acquisition and disposition due diligence analysis it helps to have a good checklist, and a good adviser. Navigating the sometimes murky waters of real property transactions can be complicated and risky when unprepared.
To arrive at a deal with favorable terms, both buyer and seller must perform a thorough and complete due diligence analysis, otherwise known as launching a thorough investigation to uncover all aspects of the real property to be conveyed. The information obtained from the results of the due diligence act to identify significant issues, and where possible, provide estimates of the financial impact such issues may have on the asset. Thereby better informing the buyer or seller and either confirming or denying the deal’s viability, or leveraging the ability to renegotiate.
Acquisition of Commercial Property
When a buyer makes an offer on a piece of commercial real estate, the offer is typically contingent on the buyer’s investigation of the property including the condition, the financial performance, title on record, interests in the property, etc. Due diligence is performed during the timeframe when the deposit is placed into escrow and the agreed upon close of escrow date.
Many times commercial real property transactions are completed on an “as-is” basis, which allows the seller to provide little to no warranties upon the close of the deal, and little to no recourse for the buyer once the sale is complete. Therefore the onus is on the buyer to perform their due diligence up front.
Disposition of Commercial Property
Many of the same standards that apply to due diligence performed in regards to the acquisition of commercial real estate, also apply to the disposition of commercial real property. Certain areas to address include, but are not limited to, the following:
- Independent appraisal of property value
- Environmental Report
- Recordable survey
- Legal description
- Location map
- Pictures of property
- Summary of property including:
- Size
- Description of physical improvements
- Any known easements, restrictions or reversions
- Current use
Financing Transactions of Commercial Real Estate
When a buyer is either looking to finance part or all of its purchase price for a piece of commercial real estate or a commercial property owner is refinancing to lower its interest rate, or due to a maturing loan, the lender will perform due diligence prior to providing financing. The buyer or property owner then has to provide all the necessary documentation regarding the property in order to facilitate the funding process.
Checklist for Performing Due Diligence
The main reason behind performing a due diligence analysis, whether in terms of an acquisition, disposition, or financing, is to arm the buyer, seller or financer with relevant information in regards to the suitability of the deal.
In addition to enlisting the assistance of a trusted adviser, the following basic checklist should be adhered to in order to ensure that the appropriate areas are investigated during the due diligence period, including, but not limited to:
| Category | Scope |
| Financial/Operations | 1. Review schedule of existing vendor/service provider contracts.2. Review two prior years’ property tax bills.
3. Identify any transfer or excise taxes for which buyer may be liable. 4. Prepare Operating Budget. 5. Prepare Capital Budget. 6. Prepare Lease Abstracts, if applicable. |
| Physical/Structural | 1. Commission new or updated physical review(s) of property by qualified consultant(s) to address areas including, but not limited to:· ADA
· Elevator Systems · Fire/Life Safety Compliance · Roof System · Elevator Equipment · HVAC Equipment · Plumbing · Parking Lot Asphalt · Window Seal Water Proofing · Other major building components. 2. If required by lender, commission new or updated Seismic/Probable Maximum Loss (PML) report by qualified structural engineer. 3. Perform property inspection and review all systems with building engineer, property manager, and/or qualified consultant(s). 4. Review history of property’s operating systems. |
| Environmental | 1. Review environmental reports and, if necessary, commission new or updated Phase I/Environmental Site Assessment (ESA).2. Review draft reports and, if applicable, coordinate additional work as indicated (Phase II, Operation & Maintenance plans for asbestos, etc.). |
Meissner Jacquét Commercial Real Estate Services has years of experience handling the acquisition and disposition of single projects, as well as complex, multi-project and portfolio transactions in major sectors of the commercial real estate industry, including office, retail, and industrial properties. Jerry Jacquét, a Principal at Meissner Jacquet, says that “we have developed the systems and relationships required to quickly and efficiently complete substantial transactions that are local, regional, and national in scope, as well as individual assets of any size.”
Meissner Jacquét’s commercial real estate acquisition and disposition services address the needs of each transaction, including land use, due diligence, environmental, joint ventures, and debt structuring. To learn more about Meissner Jacquét’s due diligence services and request a free proposal, contact Brent Williams at [email protected] or 858-373-1113.
Sources:
Meissner Jacquét Commercial Real Estate Services