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 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 adequate Due Diligence Investigation to assure you know all material facts to make a wise investment decision and to infer your startling investment yield.

The following checklists are designed to help you escort 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 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 ordinarily exercised by, a uncostly and economical [person] under the particular 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 require data 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 startling return on investment generated by the property's revenue stream, and must conclude the amount, velocity and durability of the revenue stream. A sophisticated Financial Buyer will likely infer its yield based upon discounted cash-flows rather than the must less accurate capitalization rate ("cap rate"), and will need adequate financial data 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 dispose 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 whether the planned convert is character or use can be closed in a cost-effective manner. A developer conducting due diligence will focus on issues lively store demand, access, use and finances.

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

1. "Ability to Repay" - The potential of the asset to create 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 variety in the event forced variety becomes necessary.

The number of diligent inquiry due to be expended (i.e. "Due Diligence") to research any particular industrial or industrial real estate scheme is the number of inquiry required to acknowledge 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 along with all air ownership and subterranean rights?

(g) All amelioration rights?

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

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

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

(b) adequate parking?

(c) Structural condition of improvements?

(d) Environmental contamination?

(i) Innocent Purchaser defense vs. Exemption from liability

(ii) All suitable Inquiry

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

(a) Zoning?

(b) hidden 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 asset that is likely to growth Purchaser's effective cost to fetch or use the Property?

(a) asset owner's assessments?

(b) Real estate tax in line with value?

(c) extra Assessment?

(d) Required user fees for important 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 enlarge Term?

(c) Options to Purchase?

(d) ownership of First Refusal?

(e) ownership 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 extraction 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) 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 carry the Property?

(a) Board of Director Approvals?

(b) Shareholder or Member approval?

(c) Other consents?

(d) If foreign private or entity, are any extra 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 control the asset and, if applicable, finance acquisition of the Property?

(a) Board of Director Approvals?

(b) Shareholder or Member approval?

(c) If foreign private or entity, are any extra 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 refund terms?

(d) What is the collateral?

(i) industrial real estate only?

(ii) Real estate and personal asset together?

(e) First lien? A junior lien?

(f) Is it a particular advance loan?

(g) A many advance loan?

(h) A construction loan?

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

(j) Are there keep requirements?

(i) Interest reserves?

(ii) heal reserves?

(iii) Real estate tax reserves?

(iv) insurance 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 allege minimum compensating balances?

(l) Is the Borrower required to pledge enterprise accounts as supplementary 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 expense 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 industrial Real Estate Loan

Does Purchaser have all data important 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 industrial 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 buy contract.

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

Commercial Real Estate Loan closing Checklist

1. Promissory Note

2. Personal Guaranties (which may be full, partial, secured, unsecured, cost guaranties, variety 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 detach document)

4. Mortgage [sometimes expanded to be a Mortgage, safety agreement 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 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 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 insurance (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 industrial title insurance endorsements, often including:

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

(b) Alta 3.1 Zoning Endorsement modified to include parking

(c) Alta allinclusive 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 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 report solely to the real asset comprising the collateral)

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

(i) other title insurance endorsements applicable to safe the intended use and value of the collateral, as may be considered upon report of the Commitment for Title insurance and survey or arising from the existence of extra issues pertaining to the transaction or the Borrower.

11. Current Alta survey (3 sets), [typically ready in accordance with 2005 Minimum suitable information for Alta/Acsm Land Title Surveys, certified to the lender, Buyer and the title insurer, along with items 1 straight through 4, 6, 7(a), 7(b)(1), 8 straight 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 plainly as "Sndas"].

16. Ucc, Judgment, Pending Litigation, Bankruptcy and Tax Lien hunt Report

17. Evaluation (must comply with Title Xi of Firrea (Financial Institutions Reform, salvage and obligation Act of 1989, as amended)

18. Environmental Site Evaluation 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 plainly "Acord 27 and Acord 25, respectively)

22. Legal belief of Borrower's Attorney

23. Prestige Underwriting documents, such as signed tax returns, asset 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 beneficial 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 industrial real estate transaction can be time lively and costly in all events.

If the loan requirements cannot be satisfied, it is better 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 industrial real estate transaction to survey all material facts and conditions affecting the asset and the transaction is of important importance.

Unlike owner occupied residential real estate, when a house can nearly all the time be occupied as the purchaser's home, industrial real estate acquired for enterprise use or for investment is impacted by numerous factors that may work on its use and value.

The existence of these factors and their work on on a Purchaser's potential to use the asset for its intended use and on the Purchaser's projected investment yield can only be discovered straight through diligent investigation and concentration to detail.

The circumstances of each transaction will conclude 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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