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? medical Building? Nursing Home? Hotel/Motel? Pharmacy? Bank facility? Sports and Entertainment Arena? Other?

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Homes For Sale

A Key to investing in commercial real estate is performing an sufficient Due Diligence Investigation to assure you know all material facts to make a wise investment decision and to reckon your predicted investment yield.

The following checklists are designed to help you conduct 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 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 quantum of prudence, activity, or assiduity, as is proper to be predicted from, and ordinarily exercised by, a uncostly 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 commercial or commercial 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 need data 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 suitable for that intended use.

(ii) A "Financial Buyer" is acquiring the property for the predicted return on investment generated by the property's income stream, and must decide the amount, velocity and durability of the income stream. A sophisticated Financial Buyer will likely reckon its yield based upon discounted cash-flows rather than the must less literal, capitalization rate ("cap rate"), and will need sufficient financial data to do so.

(iii) A "Developer" is seeking to add value by changing the character or use of the property - regularly with a short-term to intermediate-term exit strategy to arrange of the property; although, a Developer might plan to hold the property long term as Financial Buyer after amelioration or redevelopment. The Developer must focus on either the planned convert is character or use can be finished in a cost-effective manner. A developer conducting due diligence will focus on issues entertaining shop demand, access, use and finances.

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

1. "Ability to Repay" - The capability of the property to generate sufficient income 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 sufficient funds to repay the loan, carrying costs and costs of range in the event forced range becomes necessary.

The estimate of diligent inquiry due to be expended (i.e. "Due Diligence") to explore any particular commercial or commercial real estate scheme is the estimate of inquiry required to retort 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 whole fee title interest together with all air proprietary and subterranean rights?

(g) All amelioration rights?

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

3. Does the corporeal health of the property permit use as planned?

(a) Commercially sufficient access to group streets and ways?

(b) sufficient parking?

(c) Structural health of improvements?

(d) Environmental contamination?

(i) Innocent Purchaser defense vs. Exemption from liability

(ii) All appropriate Inquiry

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

(a) Zoning?

(b) private 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 property that is likely to growth Purchaser's productive cost to gather or use the Property?

(a) property owner's assessments?

(b) Real estate tax in line with value?

(c) special Assessment?

(d) Required user fees for considerable 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) proprietary of First Refusal?

(e) proprietary 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) self-acting subordination of Lease to hereafter 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 prevention Plan (Swppp) is required.

Ii. The Seller:

1. Who is the Seller?

(a) Individual?

(b) Trust?

(c) Partnership?

(d) Corporation?

(e) dinky Liability Company?

(f) Other legally existing entity?

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

3. Does the jobber own the Property?

4. Does jobber have authority to transport 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 company in jurisdiction of Property?

(ii) Federal Tax Withholding?

(iii) Us Patriot Act compliance?

5. Who has authority to bind Seller?

6. Are sale proceeds sufficient 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 individual or entity, are any special requirements applicable?

(i) Qualification to do company 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. company 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 refund terms?

(d) What is the collateral?

(i) commercial real estate only?

(ii) Real estate and personal property together?

(e) First lien? A junior lien?

(f) Is it a particular strengthen loan?

(g) A manifold strengthen loan?

(h) A construction loan?

(i) If it is a manifold strengthen loan, can the considerable be re-borrowed once repaid prior to maturity of the loan; making 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) assurance reserves?

(v) Environmental remediation reserves?

(vi) Other reserves?

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

(l) Is the Borrower required to pledge company accounts as further 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 price 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 commercial Real Estate Loan

Does Purchaser have all data considerable 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 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 closing Checklist for a loan secured by commercial real estate.

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

4. Mortgage [sometimes vast to be a Mortgage, safety business transaction 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 organization and written Operating Agreement, if Borrower is a dinky liability company; Certified copy of trust business transaction 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 dinky partnership) or Certificate of Qualification to Transact company (if Borrower is an entity doing company 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 prognosis by the Lender, copies of all documents of narrative appearing on schedule B of the title commitment which are to remain after closing), with required commercial title assurance endorsements, often including:

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

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

(c) Alta overall Endorsement 1

(d) Location Endorsement (street address)

(e) access Endorsement (vehicular access 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 delineate 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 assurance endorsements applicable to safe the intended use and value of the collateral, as may be thought about upon delineate of the Commitment for Title assurance and discover or arising from the existence of special issues pertaining to the transaction or the Borrower.

11. Current Alta discover (3 sets), [typically ready in accordance with 2005 Minimum appropriate information for Alta/Acsm Land Title Surveys, certified to the lender, Buyer and the title insurer, together with items 1 through 4, 6, 7(a), 7(b)(1), 8 through 11(a) and 14 from the Surveyor's "Optional discover 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 simply 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, rescue and obligation Act of 1989, as amended)

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

19. Environmental Indemnity business transaction (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 simply "Acord 27 and Acord 25, respectively)

22. Legal conception of Borrower's Attorney

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

24. Yielding business transaction (sometimes also called an Errors and Omissions Agreement), whereby the Borrower agrees to correct, after closing, errors or omissions in loan documentation.

It is useful to become well-known 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 commercial real estate transaction can be time entertaining and high-priced in all events.

If the loan requirements cannot be satisfied, it is good 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 productive due diligence investigation in a commercial real estate transaction to discover all material facts and conditions affecting the property and the transaction is of considerable importance.

Unlike owner occupied residential real estate, when a house can nearly always be occupied as the purchaser's home, commercial real estate acquired for company 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 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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