Due Diligence Checklists - For market Real Estate Transactions

Homes For Rent - Due Diligence Checklists - For market Real Estate Transactions

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Planning to buy or finance industrial or industrial 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 industrial real estate is performing an sufficient Due Diligence Investigation to assure you know all material facts to make a wise venture decision and to theorize your startling venture yield.

The following checklists are designed to help you show the way 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 industrial real estate transactions. The rule that a Buyer must examine, judge, and test for himself, applies to the buy of industrial real estate.

Due Diligence: "Such a quantum of prudence, activity, or assiduity, as is permissible to be startling from, and generally exercised by, a cheap 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 industrial 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 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 suitable for that intended use.

(ii) A "Financial Buyer" is acquiring the property for the startling return on venture generated by the property's revenue stream, and must rule the amount, velocity and stamina of the revenue stream. A sophisticated Financial Buyer will likely theorize its yield based upon discounted cash-flows rather than the must less literal, capitalization rate ("cap rate"), and will need sufficient financial facts to do so.

(iii) A "Developer" is seeking to add value by changing the character or use of the property - normally 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 amelioration or redevelopment. The Developer must focus on whether the planned change is character or use can be ended in a cost-effective manner. A developer conducting due diligence will focus on issues involving shop demand, access, use and finances.

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

1. "Ability to Repay" - The potential of the property to originate 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 sufficient funds to repay the loan, carrying costs and costs of collection in the event forced collection becomes necessary.

The estimate of diligent inquiry due to be expended (i.e. "Due Diligence") to explore any single industrial or industrial real estate task is the estimate of inquiry required to rejoinder 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 physical condition of the property permit use as planned?

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

(b) sufficient parking?

(c) Structural condition of improvements?

(d) Environmental contamination?

(i) Innocent Purchaser defense vs. Exemption from liability

(ii) All acceptable Inquiry

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

(a) Zoning?

(b) underground 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 effective cost to accumulate 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 principal 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) protection Deposits?

(b) Options to increase 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-operating subordination of Lease to future mortgages?

(o) Other material Lease terms?

10. New Construction?

(a) Availability of building permits?

(b) Utilities?

(c) Npdes (National Pollutant removal 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) minute Liability Company?

(f) Other legally existing entity?

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

3. Does the seeder own the Property?

4. Does seeder have authority to transport the Property?

(a) Board of Director Approvals?

(b) Shareholder or Member approval?

(c) Other consents?

(d) If foreign personel or entity, are any extra requirements applicable?

(i) Qualification to do firm 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 personel or entity, are any extra requirements applicable?

(i) Qualification to do firm 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. firm 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 repayment terms?

(d) What is the collateral?

(i) industrial real estate only?

(ii) Real estate and personal property together?

(e) First lien? A junior lien?

(f) Is it a single enlarge loan?

(g) A many enlarge loan?

(h) A building loan?

(i) If it is a many enlarge 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 keep requirements?

(i) Interest reserves?

(ii) repair reserves?

(iii) Real estate tax reserves?

(iv) guarnatee reserves?

(v) Environmental remediation reserves?

(vi) Other reserves?

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

(l) Is the Borrower required to pledge firm accounts as added 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 repayment 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 industrial Real Estate Loan

Does Purchaser have all facts principal to comply with the Lender's loan conclusion requirements?

Not all loan documentation requirements may be known at the outset of a transaction, although most industrial real estate loan documentation requirements are fairly typical. Some required facts can be obtained only from the Seller. Production of that facts to Purchaser for delivery to its lender must be required in the buy contract.

As advice to what a industrial real estate lender may require, the following sets forth a typical conclusion Checklist for a loan secured by industrial real estate.

Commercial Real Estate Loan conclusion Checklist

1. Promissory Note

2. Personal Guaranties (which may be full, partial, secured, unsecured, cost guaranties, collection guaranties or a collection 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 isolate document)

4. Mortgage [sometimes wide to be a Mortgage, protection agreement and Fixture Filing]

5. Assignment of Rents and Leases

6. protection 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 minute 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 minute partnership) or Certificate of Qualification to Transact firm (if Borrower is an entity doing firm 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 analysis by the Lender, copies of all documents of article appearing on program B of the title commitment which are to remain after closing), with required industrial title guarnatee endorsements, often including:

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

(b) Alta 3.1 Zoning Endorsement modified to include 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 relate solely to the real property comprising the collateral)

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

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

11. Current Alta inspect (3 sets), [typically ready in accordance with 2005 Minimum acceptable detail for Alta/Acsm Land Title Surveys, certified to the lender, Buyer and the title insurer, together with items 1 straight through 4, 6, 7(a), 7(b)(1), 8 straight through 11(a) and 14 from the Surveyor's "Optional inspect 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 article (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 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 notion of Borrower's Attorney

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

24. Compliancy 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 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 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 industrial real estate transaction can be time involving and expensive in all events.

If the loan requirements cannot be satisfied, it is great to make that measurement 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 industrial real estate transaction to inspect all material facts and conditions affecting the property and the transaction is of principal importance.

Unlike owner busy residential real estate, when a house can nearly always be busy as the purchaser's home, industrial real estate acquired for firm use or for venture is impacted by numerous factors that may influence its use and value.

The existence of these factors and their influence on a Purchaser's potential to use the property for its intended use and on the Purchaser's projected venture yield can only be discovered straight through diligent investigation and concentration 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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