Do you know about - Due Diligence Checklists - For market Real Estate Transactions
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A Key to investing in industrial real estate is performing an adequate Due Diligence Investigation to assure you know all material facts to make a wise investment decision and to infer your foreseen, investment yield.
The following checklists are designed to help you escort 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 safety laws applicable to home purchases seldom apply to industrial real estate transactions. The rule that a Buyer must examine, judge, and test for himself, applies to the purchase of industrial real estate.
Due Diligence: "Such a quantum of prudence, activity, or assiduity, as is allowable to be foreseen, from, and ordinarily exercised by, a reasonable and frugal [person] under the particular circumstances; not measured by any absolute standard, but depending upon the relative facts of the extra 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 industrial or industrial real estate depends upon the objectives of the party for whom the investigation is conducted. These objectives may vary depending upon either 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 want information only you, as Owner, can adequately provide.
General Objectives:
(i) A "Strategic Buyer" (or long-term lessee) is acquiring the property for its own use and must verify that the property is favorable for that intended use.
(ii) A "Financial Buyer" is acquiring the property for the foreseen, return on investment generated by the property's revenue stream, and must rule the amount, velocity and durability of the revenue stream. A sophisticated Financial Buyer will likely infer its yield based upon discounted cash-flows rather than the must less strict capitalization rate ("cap rate"), and will need adequate financial information to do so.
(iii) A "Developer" is seeking to add value by changing the character or use of the property - normally with a short-term to intermediate-term exit strategy to dispose of the property; although, a Developer might plan to hold the property long term as Financial Buyer after improvement or redevelopment. The Developer must focus on either the planned turn is character or use can be complete in a cost-effective manner. A developer conducting due diligence will focus on issues entertaining market demand, access, use and finances.
(iv) A "Lender" is seeking to organize two basic lending criteria:
1. "Ability to Repay" - The capability of the property to generate 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 estimate of diligent inquiry due to be expended (i.e. "Due Diligence") to explore any particular industrial or industrial real estate project is the estimate of inquiry required to acknowledge each of the following questions to the extent relevant to the objectives of the party conducting the investigation:
I. The Property:
1. Exactly what property 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 improvement rights?
2. What is Purchaser's planned use of the Property?
3. Does the bodily condition of the property permit use as planned?
(a) Commercially adequate way to group streets and ways?
(b) adequate parking?
(c) Structural condition 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 property 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 condition on or within the property that is likely to growth Purchaser's productive cost to fetch or use the Property?
(a) property owner's assessments?
(b) Real estate tax in line with value?
(c) extra Assessment?
(d) Required user fees for essential amenities?
(i) Drainage?
(ii) Access?
(iii) Parking?
(iv) Other?
7. Any encroachments onto the Property, or from the property onto other lands?
8. Are there any encumbrances on the property 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) safety Deposits?
(b) Options to extend Term?
(c) Options to Purchase?
(d) possession of First Refusal?
(e) possession of First Offer?
(f) Maintenance Obligations?
(g) Duty on Landlord to furnish 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 removal 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 stoppage Plan (Swppp) is required.
Ii. The Seller:
1. Who is the Seller?
(a) Individual?
(b) Trust?
(c) Partnership?
(d) Corporation?
(e) little Liability Company?
(f) Other legally existing entity?
2. If other than natural person, does seeder validly exist and is seeder in good standing?
3. Does the seeder own the Property?
4. Does seeder have authority to convey the Property?
(a) Board of Director Approvals?
(b) Shareholder or Member approval?
(c) Other consents?
(d) If foreign private or entity, are any extra 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 control the property and, if applicable, finance acquisition of the Property?
(a) Board of Director Approvals?
(b) Shareholder or Member approval?
(c) If foreign private or entity, are any extra 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 estimate of the loan?
(b) What is the interest rate?
(c) What are the repayment terms?
(d) What is the collateral?
(i) industrial real estate only?
(ii) Real estate and personal property together?
(e) First lien? A junior lien?
(f) Is it a particular expand loan?
(g) A multiple expand loan?
(h) A construction loan?
(i) If it is a multiple expand loan, can the essential be re-borrowed once repaid prior to maturity of the loan; production it, in effect, a revolving line of credit?
(j) Are there support requirements?
(i) Interest reserves?
(ii) heal reserves?
(iii) Real estate tax reserves?
(iv) guarnatee 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 vocalize minimum compensating balances?
(l) Is the Borrower required to pledge firm accounts as added 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 compulsion to pay Lender's expenses if the loan does not close?
B. Documenting The industrial Real Estate Loan
Does Purchaser have all information essential to comply with the Lender's loan closing requirements?
Not all loan documentation requirements may be known at the outset of a transaction, although most industrial real estate loan documentation requirements are fairly typical. Some required information can be obtained only from the Seller. Production of that information to Purchaser for delivery to its lender must be required in the purchase contract.
As guidance to what a industrial real estate lender may require, the following sets forth a typical closing Checklist for a loan secured by industrial real estate.
Commercial Real Estate Loan closing Checklist
1. Promissory Note
2. Personal Guaranties (which may be full, partial, secured, unsecured, cost guaranties, variety guaranties or a variety of other types of guarantees as may be required by Lender).
3. Loan agreement (often incorporated into the Promissory Note and/or Mortgage in lieu of being a detach document)
4. Mortgage [sometimes wide to be a Mortgage, safety agreement and Fixture Filing]
5. Assignment of Rents and Leases
6. safety 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 little liability company; Certified copy of trust agreement 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 little 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 guarnatee (which will typically require, for diagnosis by the Lender, copies of all documents of report appearing on program B of the title commitment which are to remain after closing), with required industrial title guarnatee endorsements, often including:
(a) Affirmative Creditors possession Endorsement (extending coverage over course exclusion 7 and course exclusions 3(a) and 3(d) as they review to creditor's possession matters)
(b) Alta 3.1 Zoning Endorsement modified to comprise parking
(c) Alta extensive Endorsement 1
(d) Location Endorsement (street address)
(e) way Endorsement (vehicular way to group streets and ways)
(f) Contiguity Endorsement (the insured land comprises a particular 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 review solely to the real property comprising the collateral)
(h) Usury Endorsement (insuring that the loan does not violate any prohibitions against immoderate interest charges)
(i) other title guarnatee endorsements applicable to safe the intended use and value of the collateral, as may be thought about upon review of the Commitment for Title guarnatee and inspect or arising from the existence of extra issues pertaining to the transaction or the Borrower.
11. Current Alta inspect (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 inspect 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 naturally as "Sndas"].
16. Ucc, Judgment, Pending Litigation, Bankruptcy and Tax Lien hunt Report
17. Appraisal (must comply with Title Xi of Firrea (Financial Institutions Reform, saving and compulsion Act of 1989, as amended)
18. Environmental Site Appraisal report (sometimes referred to as Environmental Phase I and/or Phase 2 Audit Reports)
19. Environmental Indemnity agreement (signed by Borrower and guarantors)
20. Site Improvements Inspection Report
21. Evidence of Hazard guarnatee naming Lender as the Mortgagee/Lender Loss Payee; and Liability guarnatee naming Lender as an "additional insured" (sometimes listed as naturally "Acord 27 and Acord 25, respectively)
22. Legal notion of Borrower's Attorney
23. Reputation Underwriting documents, such as signed tax returns, property operating statements, etc. As may be specified by Lender
24. Compliance agreement (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 customary 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 industrial real estate transaction can be time entertaining and costly in all events.
If the loan requirements cannot be satisfied, it is better to make that estimation 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 industrial real estate transaction to inspect all material facts and conditions affecting the property and the transaction is of essential importance.
Unlike owner occupied residential real estate, when a house can nearly always be occupied as the purchaser's home, industrial real estate acquired for firm use or for investment is impacted by numerous factors that may sway its use and value.
The existence of these factors and their sway on a Purchaser's capability to use the property for its intended use and on the Purchaser's projected investment yield can only be discovered through diligent investigation and concentration to detail.
The circumstances of each transaction will rule 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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