Planning to purchase or financing of commercial or industrial real estate? Shopping Center? Office Building? Restaurant / Banquet Facilities Property? Parking? Storefront? Gas station? Manufacturing plant? Gallery? Logistics terminal? Medical Building? Nursing home? Hotel / Motel? Pharmacy? Bank facility? Sports and entertainment arena? Other?
A key to investing in commercial real estate leads an adequate due diligence can assure you, knowing all the relevantFacts make a wise investment decision and to calculate the expected return on investment.
The following checklists will help you conduct a focused and meaningful due diligence.
Basic concepts of due diligence:
Commercial Real Estate transactions are not similarly large home purchases.
Caveat Emptor: Let the buyer beware.
Consumer protection laws for purchasing a home is rarely on commercial real estate transactions.The rule that a buyer is obliged to examine, evaluate, and test for yourself, apply to the acquisition of commercial properties.
Expect due diligence: "Such a measure of prudence, activity, or industry, as you might expect from, and ordinarily exercised a reasonable and prudent [person] in the particular circumstances is not measured by an absolute standard but depending on according to the relative facts of the particular case. "Black's Law Dictionary, West Publishing Company.
ContractualRepresentations and warranties are no substitute for due diligence.
Breach of representations and warranties = Litigation, time and money.
WHAT Due Diligence?
The scope, intensity and content, the due diligence investigation of commercial or industrial real estate depends on the objectives of the party, is conducted for the investigation. These objectives may vary depending on whether the investigation for the benefit of (i) a strategic buyer is conducted(or long-term tenants), (ii) a financial buyer, (iii) a developer, or (iv) a lender.
If you are a seller understand that the transaction will close, the Buyer (and its lender) must address all issues material to their destination address - which will need some information only you, as owner, can provide adequate.
GENERAL OBJECTIVES:
(i) a "strategic buyer" (or long-term lessee) acquires the property for its own use and to examine whether the property is suitable for thethat determines use.
(ii) a "financial buyer" to acquire the land for the expected return on investment by the property's source of revenue generated, and must determine the height, speed and durability of earnings. A sophisticated financial buyers, is likely to return to be calculated based on discounted cash flows, instead of requiring the capitalization rate must be less precise ( "cap rate"), and adequate financial information to do so.
(iii) A "Developer" isseeks the value by adding the character or use of property - have generally short to medium term with an exit strategy on the assets, even though it could, a developer's plan for a property buyer after long-term financial development or consider redevelopment. The developer must focus on whether the proposed change to use, or character, to be achieved in a cost effective manner. A developer carrying out due diligence focuses on issues related toMarket demand, access, benefits and finance.
(iv) "Lender" seeks to establish two basic lending criteria:
1. "Ability to repay" - The ability of the property that enough revenue to generate to repay the loan on time and to a
2. "Adequacy of collateral default" - the objective value of the securities available in the event of a loan in order to secure sufficient funds to repay the loan, will conduct and cost of collection in the event forced collectionrequired.
Investigate the amount to be spent under the careful examination (eg due diligence) on a particular commercial or industrial real estate project is the level of investigation required to each of the following questions to the extent relevant to the goals of the party Answer the study:
I. The property:
1. Exactly what property works Purchaser believe it is acquiring?
(a) land?
(b) development?
(c)Schedule?
(d) Further improvements?
(e) other rights?
(f) The entire fee title interest, including all air rights and subterranean rights?
(g) all development rights?
2. What is buyer's planned use of the property?
3. If the physical condition of the property to enable the use of schedule?
(a) Commercially reasonable access to public roads and paths?
(b) Adequate parking?
(c) the condition of the structure of improvements?
(d)Contamination of the environment?
(i) Innocent purchaser defense or exemption from liability
(ii) all appropriate inquiry
4. Is there a legal limit to the buyer to use 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 windowpermitted?
(e) any other restrictions?
5. How much does a buyer expect to pay for the property?
6. Is there any condition on or in the property, which is likely to increase the effective cost of the buyer to acquire or use of the property?
(a) Property owner's assessments?
(b) property tax in accordance with the value?
(c) Special valuation?
(d) Required fees for the necessary facilities?
(i) drainage?
(ii)Access?
(iii) parking?
(iv) Other?
7. Any intervention on the property or the property to other countries?
8. Are there any encumbrances on the property, which are not deleted at the closing gala?
(a) easements?
(b) Covenants Running with the land?
(c) Liens or other financial easements?
(d) Leasing?
9. Leasing?
(a) security deposit?
to extend (b) Option Term?
(c) Options to purchase?
(d)Rights of first refusal?
(e) rights of first offer?
(f) maintenance?
(g) Duty on Landlord to provide utilities?
(h) property tax or CAM Escrow?
(i) delinquent rent?
(j) pre-paid rent?
(k) Tenant / use controlled?
(l) Tenant exclusively?
(m) Tenant parking requirements?
(n) automatic subordination of the lease for future mortgages?
(o) Other Material Terms of hire?
10. New?
(a) availability ofBuilding permits?
(b) Utilities?
(c) NPDES (National Pollutant Discharge Elimination System) permits?
(i) Phase 2, with effect from March 2003 - Authorization to earth, if one or more hectares of land is disturbed.
(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) a limited liability company?
(f) Other legally existing entity?
2. If other than a natural person, there are valid and seller, the seller in good standing?
3. If the seller owns the property?
4. Seller is authorized to convey the property?
(a) Board of Director approvals?
(b) a shareholder or member approval?
(c) Other consent?
(d) If foreign natural or legal person shall apply any special requirements?
(i) the qualifications to do business in the jurisdiction of> Property?
(ii) Federal Tax Withholding?
(iii) comply with U.S. Patriot Act?
5. Who has authority to bind the seller?
6. Sale proceeds are insufficient to pay all liens?
III. THE BUYER:
1. Who is the buyer?
2. What is the Buyer / Grantee 's exact legal name?
3. If the buyer / grantee is a company that is effectively created and is in good standing?
(a) Articles or Incorporation - Articles of Organization
(b) CertificateGood Standing
4. Is authorized purchaser / grantee, own and operate the property and, if applicable, finance acquisition of the property?
(a) Board of Director approvals?
(b) a shareholder or member approval?
(c) If foreign natural or legal person shall apply any special requirements?
(i) the qualifications to do business with the responsibility of the property?
(ii) comply with U.S. Patriot Act?
(iii) Bank Secrecy Act / Anti-Money LaunderingCompliance?
5. Who is authorized to bind the buyer / grantee?
IV BUYER FINANCING:
A. TERMS of the loan:
What loan terms are the buyer, as borrower and the lender agreed?
(a) What is the amount of the loan?
(b) What is the interest rate?
(c) What are the repayment terms?
(d) What is the security?
(i) the only commercial real estate?
(ii) real estate and personal property together?
(e) First? lien A junior lien?
(f) Is a single advance on credit?
(g) A multiple-advance loans?
(h a building) loan?
(i) In the case of a multiple advance loans to clients once again lent repaid before maturity of the loan, which is in fact a revolving line of credit?
(j) Are there minimum?
(i) interest reserves?
(ii) the repair of reserves?
(iii) reserves, the property tax?
(iv) Insurance reserves?
(v) environmental remediationReserves?
(vi) Other reserves?
(k) Are there rules for the borrower to business operating accounts opened with the lender? If yes, is the borrower required to maintain minimum balances to cover?
(L) is the borrower to pledge business accounts as additional collateral required?
(m) Are there any prepayment penalties or yield maintenance (both as a "pre-payment penalties called)?
(n) Are there any redemption blackout periods during which Borrowers are not permitted to repay the loan?
(o) Is there a loan commitment fee, or "good faith deposit is due acceptance by the borrower's loan commitment?
(p) Is there a loan fee or brokerage loans or other loans payable lender broker or a loan at the closing?
(q) What are the borrower, the lender reimbursement obligations? When are they due? What is the borrower is required to pay Lender's expenses if the loan does not close?
B. Documentation of the> COMMERCIAL REAL ESTATE LOAN
If buyer all the information necessary to comply with loans from the lender closing requirements?
Not all loan documentation requirements at the beginning of a transaction can be known, although most of the commercial real estate loan documentation requirements are fairly typical. Some necessary information can be obtained only from the seller. Production for the information of the buyer for delivery to the creditor to purchase requiredContract.
As a guide, which is a commercial real estate lender may require, shall be secured with the following produces a typical checklist for closing a loan by commercial real estate.
Commercial Real Estate Loan Closing Checklist
1. IOU
2. Personal guarantees (which can be full, partially secured, unsecured, payment guarantees, warranties or collection of a variety of other types of guarantees and, if required by Lender).
3. Loan Agreement(often in the AC and / or mortgage, which was added instead of being a separate document)
4. Mortgage sometimes [expanded to a mortgage, Security Agreement and Fixture Filing]
5. Assignment of Rents and Leases
6. Security Agreement
7. Financial statement (sometimes called "UCC-1" or "Initial Filing" mentioned)
8. Evidence for the existence of Borrower's In Good Standing, including
(a) a certified copy of the documents, organizational unit of the bond(including the Statute, if the borrower is a corporation, Articles of Organization and Operating Agreement in writing if the borrower is a limited liability company, a certified copy of the deed of trust with all changes if the borrower is a land trust or confidence, etc. )
(b) Certificate of Good Standing (if a company or LLC) or Certificate of Existence (if a limited partnership) or qualification to Transact Business (if Borrower is an organization in a Stateother than the state of education)
9. Evidence of authority to lend to borrowers, including
(a) the borrower's certificate;
(b) Certified Resolutions
(c) Term Certificate
10. Satisfactory (Commitment for Title Insurance which generally requires, for the analysis of the Lender, copies of all documents of record, on the list B of the title commitment that will remain after closing), with the necessary commercial title insurance endorsements oftenincluding:
(a) the rights of creditors affirmative endorsement extending (extending coverage to discuss politics and political exclusion 7 Exclusions 3 (a) and 3 (d) as the rights of creditors concerning matters)
(b) ALTA 3.1 Zoning Endorsement changed, to find parking space
(c) Comprehensive ALTA Endorsement 1
(d) place Endorsement (street address)
(e) Access Endorsement (access to public roads and paths)
(f) Contiguity Endorsement (the insured land consists of a single parcelwith no gaps or gores)
(g) PIN Endorsement (insurance that identified land-click permanent index to only for PIN numbers, which are the security and that they refer only to properties from the collateral)
(h) Usury Endorsement (insurance that the loan is not any prohibitions against excessive interest)
(i) protect other title insurance endorsements for the intended use and the value of the collateral,like the review, the commitment for title insurance and the collection or will be determined by the existence of specific issues in connection with the transaction or the borrower.
11. ALTA Survey (3 sets), [generally in line with 2005 Minimum Standard Detail for ALTA / ACSM Land Title Surveys certified to the lender, buyer and title insurer, including the number 1 to 4, 6, 7 (prepared a), 7 (b) (1), 8 to 11 (a) and 14 from the Surveyor's "Optional Survey Tasksand Specifications "as" Table A "means].
12. Current Rent Roll
13. Certified copy of all leases (3 sets)
14. Tenant Estoppel Certificates
15. Tenant subordination, non-disturbance and attornment agreements sometimes [sometimes called simply "SNDAs called].
16. UCC, ruling pending litigation, insolvency and Tax Lien Search Report
17. Comply Appraisal (must be with Title XI, FIRREA (Financial Institutions Reform, Recovery and Enforcement Act of 1989, asVersion)
18. Environmental Site Assessment Report (sometimes referred to as an environmental Phase I and / or Phase 2 Audit Reports)
19. Environmental Indemnity Agreement (signed by borrower and guarantor)
20. Site Improvements Inspection Report
21. Proof of Hazard Insurance naming Lender as the mortgagee / lender loss payee and lender liability insurance naming as "additional insured" (sometimes referred to simply as "Acord 27 and Acord 25, each listed)
22. LegalAttorney's opinion of the Borrower
23. Credit Underwriting signed documents like tax returns, property income, etc. as Lender may be given
24. Compliance Agreement (sometimes referred to as an error and omissions Agreement), whereby the borrower agrees to correct, after closing, errors or omissions in the loan documentation.
It is useful to deal with loans from the lenders in the documentation requirements as early as familiar to do in the transaction to be practical. TheRequirements are likely to set further with some detail in the lender's loan commitment will be - which is usually much more detailed than most loan commitments issued in residential transactions.
Completion of due diligence in a commercial real estate transaction can be time consuming and expensive, in any case.
If the loan requirements can not be met, it is better to make this provision during the contract term "due diligence" phase - which usuallyprovides a so-called "free out" - and not at a later date if the earnest money is the risk of loss or other liability may attach for failure to close.
CONCLUSION
Conducting a due diligence investigation in an effective commercial real estate transaction to all the essential facts and circumstances, which is exploring the property and the transaction is of utmost importance.
Unlike owner occupied residential property if a house is almostacquired historically as the home of the buyer, commercial real estate for business use or for investment-fill vacancies is affected by numerous factors that may affect the use and value.
The existence of these factors and their influence on the ability to use a buyer to the property for its intended purpose and the expected investment return on the buyer is only through careful analysis and attention to detail to be discovered.
The circumstances of each transaction isto determine is what level of care required. The level of care under the circumstances is required, the care that is due.
Exercise due diligence.
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