Due Diligence Checklists - For market Real Estate Transactions

Homes For Sale - Due Diligence Checklists - For market Real Estate Transactions

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Planning to purchase or finance commercial or commercial Real Estate? Shopping Center? Office Building? Restaurant/Banquet property? Parking Lot? Storefront? Gas Station? Manufacturing facility? Warehouse? Logistics Terminal? healing Building? Nursing Home? Hotel/Motel? Pharmacy? Bank facility? Sports and Entertainment Arena? Other?

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A Key to investing in commercial real estate is performing an adequate Due Diligence Investigation to assure you know all material facts to make a wise speculation decision and to conjecture your staggering speculation yield.

The following checklists are designed to help you show the way 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 security 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 purchase of commercial real estate.

Due Diligence: "Such a part of prudence, activity, or assiduity, as is proper to be staggering from, and generally exercised by, a inexpensive and thrifty [person] under the single circumstances; not measured by any absolute standard, but depending upon the relative facts of the special 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 whether the investigation is conducted for the benefit 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 data 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 staggering return on speculation generated by the property's revenue stream, and must decide the amount, velocity and durableness of the revenue stream. A sophisticated Financial Buyer will likely conjecture its yield based upon discounted cash-flows rather than the must less literal, capitalization rate ("cap rate"), and will need adequate financial data to do so.

(iii) A "Developer" is seeking to add value by changing the character or use of the asset - normally 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 whether the planned convert is character or use can be fulfilled, in a cost-effective manner. A developer conducting due diligence will focus on issues moving shop demand, access, use and finances.

(iv) A "Lender" is seeking to establish two basic lending criteria:

1. "Ability to Repay" - The potential of the asset to create adequate 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 adequate funds to repay the loan, carrying costs and costs of variety in the event forced variety becomes necessary.

The amount of diligent inquiry due to be expended (i.e. "Due Diligence") to study any single commercial or commercial real estate project is the amount of inquiry required to sass 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 including all air possession and subterranean rights?

(g) All development rights?

2. What is Purchaser's planned use of the Property?

3. Does the bodily health of the asset permit use as planned?

(a) Commercially adequate entrance to collective streets and ways?

(b) adequate parking?

(c) Structural health of improvements?

(d) Environmental contamination?

(i) Innocent Purchaser defense vs. Exemption from liability

(ii) All accepted Inquiry

4. Is there any legal restriction to Purchaser's use of the asset as planned?

(a) Zoning?

(b) incommunicable 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 health on or within the asset that is likely to growth Purchaser's productive cost to obtain or use the Property?

(a) asset owner's assessments?

(b) Real estate tax in line with value?

(c) special Assessment?

(d) Required user fees for primary 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) security Deposits?

(b) Options to expand Term?

(c) Options to Purchase?

(d) possession of First Refusal?

(e) possession of First Offer?

(f) Maintenance Obligations?

(g) Duty on Landlord to supply 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) automated subordination of Lease to future mortgages?

(o) Other material Lease terms?

10. New Construction?

(a) Availability of construction permits?

(b) Utilities?

(c) Npdes (National Pollutant dismissal Elimination System) Permit?

(i) Phase 2 productive 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) tiny Liability Company?

(f) Other legally existing entity?

2. If other than natural person, does seller validly exist and is seller in good standing?

3. Does the seller own the Property?

4. Does seller have authority to carry the Property?

(a) Board of Director Approvals?

(b) Shareholder or Member approval?

(c) Other consents?

(d) If foreign individual or entity, are any special requirements applicable?

(i) Qualification to do firm in jurisdiction of Property?

(ii) Federal Tax Withholding?

(iii) Us Patriot Act compliance?

5. Who has authority to bind Seller?

6. Are sale proceeds adequate 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 operate the asset and, if applicable, finance acquisition of the Property?

(a) Board of Director Approvals?

(b) Shareholder or Member approval?

(c) If foreign individual or entity, are any special requirements applicable?

(i) Qualification to do firm 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. firm Terms Of The Loan:

What loan terms have the Purchaser, as Borrower, and its Lender agreed to?

(a) What is the amount of the loan?

(b) What is the interest rate?

(c) What are the repayment 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 enlarge loan?

(g) A complicated enlarge loan?

(h) A construction loan?

(i) If it is a complicated enlarge loan, can the primary be re-borrowed once repaid prior to maturity of the loan; development it, in effect, a revolving line of credit?

(j) Are there maintain requirements?

(i) Interest reserves?

(ii) fix reserves?

(iii) Real estate tax reserves?

(iv) assurance reserves?

(v) Environmental remediation reserves?

(vi) Other reserves?

(k) Are there requirements for Borrower to open firm operating accounts with the Lender? If so, is the Borrower obligated to speak minimum compensating balances?

(l) Is the Borrower required to pledge firm accounts as additional collateral?

(m) Are there early repayment fees or yield maintenance requirements (each sometimes referred to as "pre-payment penalties")?

(n) Are there repayment blackout periods while 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 repayment 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 data primary 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 data can be obtained only from the Seller. Production of that data to Purchaser for delivery to its lender must be required in the purchase contract.

As guidance 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 isolate document)

4. Mortgage [sometimes extensive to be a Mortgage, security trade and Fixture Filing]

5. Assignment of Rents and Leases

6. security 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 tiny 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 tiny partnership) or Certificate of Qualification to Transact firm (if Borrower is an entity doing firm 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 assurance (which will typically require, for analysis by the Lender, copies of all documents of narrative appearing on program B of the title commitment which are to remain after closing), with required commercial title assurance endorsements, often including:

(a) Affirmative Creditors possession Endorsement (extending coverage over course exclusion 7 and course exclusions 3(a) and 3(d) as they reveal to creditor's possession matters)

(b) Alta 3.1 Zoning Endorsement modified to consist of parking

(c) Alta extensive Endorsement 1

(d) Location Endorsement (street address)

(e) entrance Endorsement (vehicular entrance to collective 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 reveal solely to the real asset comprising the collateral)

(h) Usury Endorsement (insuring that the loan does not violate any prohibitions against excessive interest charges)

(i) other title assurance endorsements applicable to protect the intended use and value of the collateral, as may be carefully upon reveal of the Commitment for Title assurance and recognize or arising from the existence of special issues pertaining to the transaction or the Borrower.

11. Current Alta recognize (3 sets), [typically prepared in accordance with 2005 Minimum accepted detail for Alta/Acsm Land Title Surveys, certified to the lender, Buyer and the title insurer, including items 1 through 4, 6, 7(a), 7(b)(1), 8 through 11(a) and 14 from the Surveyor's "Optional recognize 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 quest Report

17. Evaluation (must comply with Title Xi of Firrea (Financial Institutions Reform, rescue and enforcement Act of 1989, as amended)

18. Environmental Site Evaluation narrative (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 assurance naming Lender as the Mortgagee/Lender Loss Payee; and Liability assurance naming Lender as an "additional insured" (sometimes listed as plainly "Acord 27 and Acord 25, respectively)

22. Legal belief of Borrower's Attorney

23. Credit 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 beneficial to come to be familiar with the Lender's loan documentation requirements as early in the transaction as practical. The requirements will likely be set forth with some detail 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 moving and high-priced in all events.

If the loan requirements cannot be satisfied, it is better to make that measurement while 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 productive due diligence investigation in a commercial real estate transaction to recognize all material facts and conditions affecting the asset and the transaction is of primary importance.

Unlike owner occupied residential real estate, when a house can nearly all the time be occupied as the purchaser's home, commercial real estate acquired for firm use or for speculation is impacted by numerous factors that may influence its use and value.

The existence of these factors and their influence 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 decide 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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