Due Diligence Checklists - For Commercial Real Estate Transactions

Planning to purchase or finance Commercial or Industrial 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?

A KEY to investing in commercial real estate is performing an adequate Due Diligence Investigation to assure you know all material facts to make a wise investment decision and to calculate your expected 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 protection 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 measure of prudence, activity, or assiduity, as is proper to be expected from, and ordinarily exercised by, a reasonable and prudent [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 industrial real estate depends upon the objectives of the party for whom the investigation is conducted. These objectives may vary depending upon whether 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 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 expected return on investment generated by the property's income stream, and must determine the amount, velocity and durability of the revenue stream. A sophisticated Financial Buyer will likely calculate 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 property - usually 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 development or redevelopment. The Developer must focus on whether the planned change is character or use can be accomplished in a cost-effective manner. A developer conducting due diligence will focus on issues involving market demand, access, use and finances.

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

1. "Ability to Repay" - The ability of the property to generate sufficient 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 collection in the event forced collection becomes necessary.

The amount of diligent inquiry due to be expended (i.e. "Due Diligence") to investigate any particular commercial or industrial real estate project is the amount of inquiry required to answer 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 rights and subterranean rights?

(g) All development rights?

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

3. Does the physical condition of the Property permit use as planned?

(a) Commercially adequate access to public streets and ways?

(b) Sufficient parking?

(c) Structural condition 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 condition on or within the Property that is likely to increase Purchaser's effective cost to acquire 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 necessary 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) Security Deposits?

(b) Options to Extend Term?

(c) Options to Purchase?

(d) Rights of First Refusal?

(e) Rights of First Offer?

(f) Maintenance Obligations?

(g) Duty on Landlord to provide 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) Automatic 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 Discharge Elimination System) Permit?

(i) Phase 2 effective 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) Limited 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 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 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 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 operate 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 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 amount of the loan?

(b) What is the interest rate?

(c) What are the repayment 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 single advance loan?

(g) A multiple advance loan?

(h) A construction loan?

(i) If it is a multiple advance 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 reserve requirements?

(i) Interest reserves?

(ii) Repair reserves?

(iii) Real estate tax reserves?

(iv) Insurance 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 maintain minimum compensating balances?

(l) Is the Borrower required to pledge business accounts as additional 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 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 expense reimbursement 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 information necessary 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 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 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, collection 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 separate document)

4. Mortgage [sometimes expanded to be a Mortgage, Security Agreement and Fixture Filing]

5. Assignment of Rents and Leases

6. Security 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 limited 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 limited 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 Insurance (which will typically require, for analysis by the Lender, copies of all documents of record appearing on Schedule B of the title commitment which are to remain after closing), with required commercial title insurance endorsements, often including:

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

(b) ALTA 3.1 Zoning Endorsement modified to include parking

(c) ALTA Comprehensive Endorsement 1

(d) Location Endorsement (street address)

(e) Access Endorsement (vehicular access to public 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 relate 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 insurance endorsements applicable to protect the intended use and value of the collateral, as may be determined upon review of the Commitment for Title Insurance and Survey or arising from the existence of special issues pertaining to the transaction or the Borrower.

11. Current ALTA Survey (3 sets), [typically prepared in accordance with 2005 Minimum Standard 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 Survey 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 Search Report

17. Appraisal (must comply with Title XI of FIRREA (Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended)

18. Environmental Site Assessment 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 Insurance naming Lender as the Mortgagee/Lender Loss Payee; and Liability Insurance naming Lender as an "additional insured" (sometimes listed as simply "Acord 27 and Acord 25, respectively)

22. Legal Opinion of Borrower's Attorney

23. Credit 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 useful to become familiar 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 commercial real estate transaction can be time consuming and expensive in all events.

If the loan requirements cannot be satisfied, it is better to make that determination 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 effective due diligence investigation in a commercial real estate transaction to discover all material facts and conditions affecting the Property and the transaction is of critical 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 business use or for investment is impacted by numerous factors that may affect its use and value.

The existence of these factors and their affect on a Purchaser's ability to use the Property for its intended use and on the Purchaser's projected investment yield can only be discovered through diligent investigation and attention to detail.

The circumstances of each transaction will determine 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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Door Choices: What Doors Are Available for My Commercial Building?

Choosing the right doors for commercial facilities depends on a unique set of considerations that is very different from that of residential structures. These doors must not only satisfy safety and design considerations, but they also must comply with local building codes and Americans with Disabilities Act (ADA) requirements. Commercial Minneapolis construction projects also need to fulfill the National Fire Protection Association (NFPA) fire safety standards. Other factors to be considered include insulation properties, maintenance and installation requirements and the lead-time of the material.

Swing and Revolving Doors

Depending on the specific design requirements, Minneapolis commercial contractors generally choose one of four main types of doors. The most common is the swing door. These doors are hung on hinges or pivots opening toward the exterior of the building. In the event of an emergency, this makes it easier for the occupants by allowing them to push the door open rather than having to pull it toward them to open it.

Minneapolis construction projects that require a higher level of security, such as a bank or a large office building, will generally opt for revolving doors. Revolving doors are made of two or more intersecting panels that hang on a center shaft, and rotate around a vertical axis within a round enclosure when activated either manually or by some electronic means.

These doors are excellent security devices as the spacing between the doors can be varied to allow single-person entry and prevent "tailgating." Certain commercial establishments use revolving doors that are designed with a sensor-activated brake for one-way traffic. Common examples include airports exits that prevent a person from bypassing airport security checkpoints.

Sliding and Overhead Doors

The third type of doors often seen in commercial construction is the sliding door. A sliding door is mounted on a track and opens horizontally by sliding. Sliding glass doors are popular choices for entrances to commercial structures. Minneapolis commercial contractors recommend sliding doors for locations where space is an issue, and it is important that the door not obstruct the width of a hallway.

Finally, there are overhead doors. Similar to garage doors, they are primarily used on vehicle maintenance facilities and loading docks. Sliding doors open vertically, rolling on tracks into an overhead position.

Other Considerations

Once the type of door is chosen, the next considerations are materials and hardware. The hardware for commercial doors differs from those meant for residential use. Minneapolis commercial contractors customarily use heavy-duty Grade 1 or Grade 2 hardware, which can withstand higher levels of abuse, on commercial doors.

The exterior skins of commercial doors are made from heavier or higher graded materials, with steel being the most common. Steel doors combine strength and security in a relatively cost-effective package. Glass and aluminum openings are also common, though they are primarily used for their appearance, as they are more vulnerable than steel. Other more expensive options include fiberglass doors that can last years with little or no maintenance.

To conclude, a number of decorative finishes are also available for commercial doors based on the material and application. While steel doors are typically primed and painted, fiberglass doors come in certain basic colors that will last for years with a little care. A Minneapolis commercial contractor will be able to help you make the right choice for the doors for your commercial building.

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What Skills Are Needed by a Commercial Building Surveying Pro?

If you need to hire a commercial building surveying professional, you'll want to be sure that you hire someone with a multitude of skills. This is a profession that requires a set of qualifications and experience related to the building and construction industry as well as to business in general. The surveyor needs to be well versed in multiple areas in order to work on your behalf. Read on for tips and advice related to skills you'll want to ensure your surveyor possesses.

Accreditation

Anyone in the surveying industry --- whether it's residential surveys or commercial building surveying, needs training. In the United Kingdom, that individual will also need to possess membership with the Royal Institute of Chartered Surveyors. By working with someone with this accreditation, you can be sure that you're working with someone with the right set of skills.

In order to become a member of the RICS in the UK, there are several routes, including training and adaptation. Training can be acquired through formal schooling and adaptation happens when someone has sufficient experience to be considered skilled in the field of surveying.

Experience

Hiring a surveyor fresh out of training is something that a lot of companies won't do for commercial surveys unless that recently graduated individual is working under the guidance of a skilled and experienced surveying company.

Most people who want commercial surveying expertise will go to an expert with many years of experience. Many new surveyors will work with others to gain experience so that they can go on to do their own contracts later on. Experience assures clients that the consultant has adequate skills and knowledge, particularly with consulting and planning on high profile or extensive renovation or restoration projects. Because this profession encompasses many areas of safety and risk assessment, experience is considered essential for most people looking for a commercial survey.

People Skills

A commercial surveyor has to do more than measure and analyse a commercial location. That person needs to be able to communicate effectively, especially when action is required to protect people or to correct problems that could pose safety risks. When looking at your options, being comfortable and able to communicate with the consultant will make the job easier.

Organisational Skills

Strong organisational skills are definitely an asset when dealing with a large or complex building or project. Where commercial scenarios are in progress there are often deadlines and money involved. Strong organisational skills will assure you that your surveyor is going to be effective at helping you meet your goals.

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New Construction and Even Property Renovations May Require Commercial Surveying Services

Whether you are contemplating the purchase of an empty field to construct your dream home or an existing building to renovate, Leicester chartered surveyor services may be in order. Commercial surveying services are likely needed to assess your potential purchase. Are there any hidden dangers to that attractive property such as sinkholes, unstable ground or even a crumbling foundation? Assessing your risk before you spend money is a smart move.

Choosing a Leicester Chartered Surveyor You Can Trust

When hiring a surveyor in the UK, inquire as to whether they are a member of the Royal Institute of Chartered Surveyors (RICS). This is the leading governing organisation that sets the standards by which surveyors should abide by. Membership in this organization means that the person has gone through rigorous training and testing to perfect their craft. Besides RICS status, inquire about the years of experience the surveyor has in addition to the type of projects they have worked on. Ask for professional references... and check them out too.

Typical Services You May Need

Commercial surveying services are a must if you plan to spend money purchasing property of any kind, whether it is an empty lot or an existing structure. A chartered surveyor can evaluate the property to determine if there are any boundary issues with the neighbors. Ease of conversion, the current state of the property and even its potential for future construction or renovation are also assessed. If there are any problems which may take a considerable amount of money to repair, your surveyor can determine those things so you can negotiate a better deal with the seller, based on the findings.

Dilapidation studies can also be conducted by your surveyor. Fire risk assessments are important to ensure the property is following current fire laws regarding safety. Some buildings in Leicestershire have not been through any audits for fire risk compliance in years so this is an important step before purchasing a property with existing structures.

If you have to submit any applications for building and permits, your surveyor can help you with the process. They know what to look for and how to help you comply with any legal requirements. Some surveyors also branch out into energy assessments. Knowing the current laws regarding energy performance such as for air conditioning and boiler systems is a plus in the compliance process.

Purchasing a property is a major investment so you should protect that investment. Your local Leicester commercial surveyor can save you a lot of time and money should there be something wrong with the property you have identified to invest in.

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