Due Diligence Checklists - For commercial Real Estate Transactions

Homes For Rent - Due Diligence Checklists - For commercial 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? 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 speculation decision and to suspect your imaginable speculation 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 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 measure of prudence, activity, or assiduity, as is allowable to be imaginable from, and commonly exercised by, a inexpensive and prudent [person] under the singular 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 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 need 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 favorable for that intended use.

(ii) A "Financial Buyer" is acquiring the asset for the imaginable return on speculation generated by the property's revenue stream, and must resolve the amount, velocity and durableness of the revenue stream. A sophisticated Financial Buyer will likely suspect its yield based upon discounted cash-flows rather than the must less strict 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 - normally 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 amelioration 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 keen store demand, access, use and finances.

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

1. "Ability to Repay" - The quality of the asset to generate adequate 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 range in the event forced range becomes necessary.

The number of diligent inquiry due to be expended (i.e. "Due Diligence") to explore any singular market or market real estate scheme is the number 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 asset does Purchaser believe it is acquiring?

(a) Land?

(b) Building?

(c) Fixtures?

(d) Other Improvements?

(e) Other Rights?

(f) The entire fee title interest together with all air possession and subterranean rights?

(g) All amelioration rights?

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

3. Does the bodily condition of the asset permit use as planned?

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

(b) adequate parking?

(c) Structural condition 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) 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 asset that is likely to increase Purchaser's effective cost to collect 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 essential 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) automatic 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 dismissal 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 arresting 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 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 individual or entity, are any special requirements applicable?

(i) Qualification to do enterprise 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 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 enterprise 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. enterprise 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 reimbursement 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 singular advance loan?

(g) A multiple advance loan?

(h) A construction loan?

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

(j) Are there retain requirements?

(i) Interest reserves?

(ii) fix reserves?

(iii) Real estate tax reserves?

(iv) guarnatee reserves?

(v) Environmental remediation reserves?

(vi) Other reserves?

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

(l) Is the Borrower required to pledge enterprise accounts as added collateral?

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

(n) Are there reimbursement 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 charge reimbursement obligations to Lender? When are they due? What is the Borrower's promulgation to pay Lender's expenses if the loan does not close?

B. Documenting The market Real Estate Loan

Does Purchaser have all information essential 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. Production of that information 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 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, 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 wide 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 enterprise (if Borrower is an entity doing enterprise 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 guarnatee (which will typically require, for pathology by the Lender, copies of all documents of report appearing on agenda B of the title commitment which are to remain after closing), with required market title guarnatee endorsements, often including:

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

(b) Alta 3.1 Zoning Endorsement modified to comprise parking

(c) Alta allembracing 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 singular 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 asset comprising the collateral)

(h) Usury Endorsement (insuring that the loan does not violate any prohibitions against excessive interest charges)

(i) other title guarnatee endorsements applicable to protect the intended use and value of the collateral, as may be considered upon delineate of the Commitment for Title guarnatee and study or arising from the existence of special issues pertaining to the transaction or the Borrower.

11. Current Alta study (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, together with items 1 through 4, 6, 7(a), 7(b)(1), 8 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 hunt Report

17. Estimation (must comply with Title Xi of Firrea (Financial Institutions Reform, saving and promulgation Act of 1989, as amended)

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

22. Legal idea of Borrower's Attorney

23. Reputation Underwriting documents, such as signed tax returns, asset 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 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 market real estate transaction can be time keen and expensive in all events.

If the loan requirements cannot be satisfied, it is great to make that measurement 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 effective due diligence investigation in a market real estate transaction to study all material facts and conditions affecting the asset 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 enterprise use or for speculation 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 speculation yield can only be discovered through diligent investigation and attentiveness to detail.

The circumstances of each transaction will resolve 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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