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 market or market Real Estate? Shopping Center? Office Building? Restaurant/Banquet property? Parking Lot? Storefront? Gas Station? Manufacturing facility? Warehouse? Logistics Terminal? medical 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 speculation decision and to surmise your thinkable, speculation 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 purchase of market real estate.

Due Diligence: "Such a quantum of prudence, activity, or assiduity, as is permissible to be thinkable, from, and generally exercised by, a uncostly and prudent [person] under the single 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 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 advantage 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 facts 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 convenient for that intended use.

(ii) A "Financial Buyer" is acquiring the property for the thinkable, return on speculation generated by the property's earnings stream, and must rule the amount, velocity and durability of the earnings stream. A sophisticated Financial Buyer will likely surmise its yield based upon discounted cash-flows rather than the must less correct capitalization rate ("cap rate"), and will need adequate financial facts to do so.

(iii) A "Developer" is seeking to add value by changing the character or use of the property - commonly 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 done in a cost-effective manner. A developer conducting due diligence will focus on issues enchanting market demand, access, use and finances.

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

1. "Ability to Repay" - The capability of the property to create 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 range in the event forced range becomes necessary.

The number of diligent inquiry due to be expended (i.e. "Due Diligence") to research any single market or market real estate project is the number of inquiry required to reply 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 proprietary and subterranean rights?

(g) All improvement rights?

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

3. Does the corporal condition of the property permit use as planned?

(a) Commercially adequate way to social streets and ways?

(b) adequate parking?

(c) Structural condition of improvements?

(d) Environmental contamination?

(i) Innocent Purchaser defense vs. Exemption from liability

(ii) All suitable Inquiry

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

(a) Zoning?

(b) inexpressive 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 condition on or within the property that is likely to growth Purchaser's sufficient cost to obtain 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 expand Term?

(c) Options to Purchase?

(d) proprietary of First Refusal?

(e) proprietary 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 dismissal 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 stoppage Plan (Swppp) is required.

Ii. The Seller:

1. Who is the Seller?

(a) Individual?

(b) Trust?

(c) Partnership?

(d) Corporation?

(e) miniature 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 private or entity, are any extra requirements applicable?

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

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

(a) What is the number 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 property together?

(e) First lien? A junior lien?

(f) Is it a single advance loan?

(g) A complicated advance loan?

(h) A building loan?

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

(j) Are there withhold requirements?

(i) Interest reserves?

(ii) repair reserves?

(iii) Real estate tax reserves?

(iv) assurance reserves?

(v) Environmental remediation reserves?

(vi) Other reserves?

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

(l) Is the Borrower required to pledge business 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 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 expense refund obligations to Lender? When are they due? What is the Borrower's obligation to pay Lender's expenses if the loan does not close?

B. Documenting The market Real Estate Loan

Does Purchaser have all facts essential to comply with the Lender's loan end 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 facts can be obtained only from the Seller. Yield of that facts to Purchaser for delivery to its lender must be required in the purchase contract.

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

Commercial Real Estate Loan end Checklist

1. Promissory Note

2. Personal Guaranties (which may be full, partial, secured, unsecured, payment guaranties, range guaranties or a range of other types of guarantees as may be required by Lender).

3. Loan deal (often incorporated into the Promissory Note and/or Mortgage in lieu of being a cut off document)

4. Mortgage [sometimes expanded to be a Mortgage, safety deal 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 club and written Operating Agreement, if Borrower is a miniature liability company; Certified copy of trust deal 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 miniature partnership) or Certificate of Qualification to Transact business (if Borrower is an entity doing business 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 description appearing on program B of the title commitment which are to remain after closing), with required market title assurance endorsements, often including:

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

(b) Alta 3.1 Zoning Endorsement modified to contain parking

(c) Alta total Endorsement 1

(d) Location Endorsement (street address)

(e) way Endorsement (vehicular way to social 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 retell solely to the real property 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 safe the intended use and value of the collateral, as may be carefully upon retell of the Commitment for Title assurance and peruse or arising from the existence of extra issues pertaining to the transaction or the Borrower.

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

17. Appraisal (must comply with Title Xi of Firrea (Financial Institutions Reform, recovery and obligation Act of 1989, as amended)

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

19. Environmental Indemnity deal (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 naturally "Acord 27 and Acord 25, respectively)

22. Legal idea of Borrower's Attorney

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

24. Yielding deal (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 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 enchanting and costly in all events.

If the loan requirements cannot be satisfied, it is great to make that determination 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 sufficient due diligence investigation in a market real estate transaction to peruse 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, market real estate acquired for business use or for speculation is impacted by numerous factors that may work on its use and value.

The existence of these factors and their work on on a Purchaser's capability to use the property for its intended use and on the Purchaser's projected speculation yield can only be discovered straight through diligent investigation and attentiveness 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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