Are you planning to purchase, finance or develop any of the following types of Commercial or Industrial Real Estate?
• Shopping Center?- • Office Building?
- • Restaurant/Banquet property?
- • Parking Lot/Parking garage?
- • Retail Store?
- • Gas Station?
- • Manufacturing facility?
- • Distribution Center?
- • Logistics Terminal?
- • Medical Building?
- • Nursing Home?
- • Hotel/Motel?
- • Mixed-Use?
- • Pharmacy?
- • Special Use facility ?
- • Other?
A KEY element to successfully investing in commercial or industrial real estate is performing an adequate Due Diligence Investigation prior to becoming legally bound to acquire the property. An adequate Due Diligence Investigation will assure awareness of all material facts relevant to the intended use or disposition of the property after closing.
The following checklists will help you conduct a focused and meaningful Due Diligence Investigation.
BASIC DUE DILIGENCE CONCEPTS
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 $$$$$.
The point of commercial real estate due diligence is to avoid transaction surprises and confirm the Property can be used as intended.
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 their respective objectives – 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 anticipated revenue 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 much 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 a Financial Buyer after development or redevelopment. The Developer must focus on whether the planned change in character or use can be accomplished in a cost-effective manner.
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