Due Diligence Checklists - For industrial Real Estate Transactions

Homes For Rent - Due Diligence Checklists - For industrial Real Estate Transactions

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Planning to buy or finance market or market 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 market real estate is performing an adequate Due Diligence Investigation to assure you know all material facts to make a wise venture decision and to imagine your improbable venture yield.

The following checklists are designed to help you guide 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 market real estate transactions. The rule that a Buyer must examine, judge, and test for himself, applies to the buy of market real estate.

Due Diligence: "Such a part of prudence, activity, or assiduity, as is proper to be improbable from, and generally exercised by, a reasonable and thrifty [person] under the particular 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 market or market 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 require information 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 convenient for that intended use.

(ii) A "Financial Buyer" is acquiring the asset for the improbable return on venture generated by the property's earnings stream, and must decide the amount, velocity and endurance of the earnings stream. A sophisticated Financial Buyer will likely imagine its yield based upon discounted cash-flows rather than the must less precise 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 asset - regularly with a short-term to intermediate-term exit strategy to arrange of the property; although, a Developer might plan to hold the asset long term as Financial Buyer after improvement or redevelopment. The Developer must focus on either the planned turn is character or use can be accomplished in a cost-effective manner. A developer conducting due diligence will focus on issues interesting store demand, access, use and finances.

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

1. "Ability to Repay" - The quality of the asset to originate adequate earnings 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 whole of diligent inquiry due to be expended (i.e. "Due Diligence") to study any particular market or market real estate task is the whole of inquiry required to write back 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 whole fee title interest along with all air possession and subterranean rights?

(g) All improvement 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 access to communal streets and ways?

(b) adequate parking?

(c) Structural health of improvements?

(d) Environmental contamination?

(i) Innocent Purchaser defense vs. Exemption from liability

(ii) All standard Inquiry

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

(a) Zoning?

(b) hidden land use controls?

(c) Americans with Disabilities Act?

(d) Availability of licenses?

(i) Liquor license?

(ii) Entertainment license?

(iii) Outdoor dining license?

(iv) Drive straight 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 sufficient cost to derive 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 principal 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) safety 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 time to come mortgages?

(o) Other material Lease terms?

10. New Construction?

(a) Availability of building permits?

(b) Utilities?

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

(i) Phase 2 sufficient March 2003 - Permit required if earth is disturbed on one acre or more of land.

(ii) If applicable, Storm Water Pollution prevention Plan (Swppp) is required.

Ii. The Seller:

1. Who is the Seller?

(a) Individual?

(b) Trust?

(c) Partnership?

(d) Corporation?

(e) exiguous 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 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 control 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 whole of the loan?

(b) What is the interest rate?

(c) What are the refund terms?

(d) What is the collateral?

(i) market real estate only?

(ii) Real estate and personal asset together?

(e) First lien? A junior lien?

(f) Is it a particular expand loan?

(g) A many expand loan?

(h) A building loan?

(i) If it is a many expand loan, can the principal be re-borrowed once repaid prior to maturity of the loan; making it, in effect, a revolving line of credit?

(j) Are there sustain requirements?

(i) Interest reserves?

(ii) heal reserves?

(iii) Real estate tax reserves?

(iv) insurance 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 claim minimum compensating balances?

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

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

(n) Are there refund blackout periods during 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 price refund 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 market Real Estate Loan

Does Purchaser have all information principal 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 market real estate loan documentation requirements are fairly typical. Some required information can be obtained only from the Seller. Output of that information to Purchaser for delivery to its lender must be required in the buy contract.

As guidance to what a market real estate lender may require, the following sets forth a typical closing Checklist for a loan secured by market real estate.

Commercial Real Estate Loan closing 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 business agreement (often incorporated into the Promissory Note and/or Mortgage in lieu of being a separate document)

4. Mortgage [sometimes vast to be a Mortgage, safety business 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 exiguous liability company; Certified copy of trust business 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 exiguous 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 insurance (which will typically require, for determination by the Lender, copies of all documents of article appearing on program B of the title commitment which are to remain after closing), with required market title insurance endorsements, often including:

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

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

(c) Alta unabridged Endorsement 1

(d) Location Endorsement (street address)

(e) access Endorsement (vehicular access to communal 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 recite 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 insurance endorsements applicable to protect the intended use and value of the collateral, as may be carefully upon recite of the Commitment for Title insurance and study or arising from the existence of special issues pertaining to the transaction or the Borrower.

11. Current Alta study (3 sets), [typically ready in accordance with 2005 Minimum standard information for Alta/Acsm Land Title Surveys, certified to the lender, Buyer and the title insurer, along with items 1 straight through 4, 6, 7(a), 7(b)(1), 8 straight through 11(a) and 14 from the Surveyor's "Optional study 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 crusade Report

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

18. Environmental Site Assessment article (sometimes referred to as Environmental Phase I and/or Phase 2 Audit Reports)

19. Environmental Indemnity business agreement (signed by Borrower and guarantors)

20. Site Improvements Inspection Report

21. Evidence of Hazard insurance naming Lender as the Mortgagee/Lender Loss Payee; and Liability insurance naming Lender as an "additional insured" (sometimes listed as plainly "Acord 27 and Acord 25, respectively)

22. Legal opinion of Borrower's Attorney

23. Credit Underwriting documents, such as signed tax returns, asset operating statements, etc. As may be specified by Lender

24. Yielding business 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 become customary with the Lender's loan documentation requirements as early in the transaction as practical. The requirements will likely be set forth with some information 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 market real estate transaction can be time interesting and costly in all events.

If the loan requirements cannot be satisfied, it is good to make that estimation during 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 sufficient due diligence investigation in a market real estate transaction to study all material facts and conditions affecting the asset and the transaction is of principal importance.

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

The existence of these factors and their influence on a Purchaser's quality to use the asset for its intended use and on the Purchaser's projected venture yield can only be discovered straight through diligent investigation and concentration 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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