As a Buyer, it is important to remember you have a right to inspect and fully understand the physical and financial operation of a building. The seller has obligations based on the structure of the Agreement of Purchase & Sale and they need to supply the requested information without delay. These obligations are performance-based, and the Seller is bound to cooperate in a timely and professional manner. Time is of the essence for you to meet your obligations and deadlines! This is why an agreement of purchase and sale is key to the due diligence process and needs to be structured so everyone understands their obligations.
It is advisable to be prepared and know in advance the information you will be requesting from the seller. This will allow you to request the needed/wanted information from the seller as soon as the agreement of purchase of sale has been accepted.
When you’re stepping into the role, remember you hold the power to delve deep into every aspect of a property. The seller is not just obligated but bound by the Agreement of Purchase & Sale to provide all necessary details promptly and professionally. Time is crucial here! Your due diligence relies on swift action and clear communication to meet deadlines. Crafting a solid agreement ensures everyone knows their responsibilities upfront.
Due diligence is the comprehensive evaluation and understanding of a business or investment to establish its assets and liabilities and evaluate its commercial potential. It is typically conducted before a business transaction, such as a merger, acquisition, or investment in real estate. Here are the key aspects of due diligence in detail:
1. Definition and Purpose
- Definition: Due diligence refers to the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party.
- Purpose: The primary goal is to confirm all material facts regarding a purchase. This includes ensuring no hidden liabilities, verifying the value of assets, and assessing potential risks.
2. Types of Due Diligence
- Financial Due Diligence: Examination of financial records to assess the financial health of a building. This includes reviewing the income and expense statements and evaluating financial forecasts and valuations.
- Legal Due Diligence: Involves checking for legal risks, reviewing contracts, litigation history, intellectual property rights, and ensuring compliance with relevant laws and regulations.
- Operational Due Diligence: Assessment of the operational aspects of the building and operational efficiency of all mechanical components.
- Commercial Due Diligence: Analysis of the market in which the building operates, including market conditions, competition, customer base, and growth potential.
- Environmental Due Diligence: Evaluation of environmental liabilities, compliance with environmental regulations, and potential environmental impacts of the building’s operations.
3. Steps Involved in Due Diligence
- Preparation: Define the scope and objectives of the due diligence process in the agreement of purchase and sale. Assemble a team of experts, such as accountants, engineers, lawyers, and other industry specialists.
- Information Gathering: Collect relevant documents and information. This can include financial statements, tax records, contracts, intellectual property documentation, and operational data.
- Analysis: Examine the collected information to identify any red flags, potential liabilities, or areas of concern. This involves a detailed review and often involves creating financial models, risk assessments, and SWOT analyses (Strengths, Weaknesses, Opportunities, Threats).
- Reporting: Prepare a due diligence report that summarizes the findings. This report typically includes an executive summary, detailed analysis, identified risks, and recommendations.
- Decision Making: Based on the due diligence report, the acquiring or investing party makes an informed decision about whether to proceed with the transaction, renegotiate terms, or withdraw from the deal.
4. Importance of Due Diligence
- Risk Mitigation: Helps identify and mitigate potential risks associated with a transaction.
- Informed Decision Making: Provides a detailed understanding of the target investment, enabling better-informed decisions.
- Valuation: Assists in determining the fair value of the target building.
- Negotiation: Equips the negotiating party with critical information that can be used to negotiate better terms.
- Compliance: Ensures that the transaction complies with all applicable laws and regulations.
5. Challenges in Due Diligence
- Time-Consuming: The process can be lengthy and resource-intensive.
- Access to Information: Difficulty in obtaining all necessary information, especially if the target investment is not cooperative.
- Complexity: Managing and analyzing vast amounts of data can be complex and requires specialized knowledge.
- Confidentiality: Ensuring the confidentiality of sensitive information throughout the process.
Due diligence is a critical process in the real estate investment world, providing essential insights and helping to avoid costly mistakes by thoroughly evaluating all aspects of a potential business transaction
To ace your game, prep your requests beforehand. As soon as that purchase agreement is inked, fire off your queries. The faster you get the info you need, the sooner you can make informed decisions and move forward confidently.
Master List of Due Diligence Package – Some items will be optional based on the building and personal preference, while others will be required for financing.
- Pictures
- Agreement of Purchase & Sale
- Rent Roll
- Tenant Rental Status Report
- Survey
- Taxes- Interim or Final
- MPAC Statement Showing Individual School Tax Paid Per Unit
- Zoning and Permitted Uses
- Appraisal
- Mortgage Statement(s)
- Insurance Policy
- Insurance Quote
- Phase One Quote
- Management Contract
- Superintendent Contract
- Gas Bills
- Hydro Bills
- Water & Sewer Bills
- Other- Telephone, Cable TV. etc.
- Elevator
- Contracts
- Capital Item Improvement Leases
- Additional Revenue Contracts
- Floor Plans or Unit Square Footage
- Pest Control
- Snow Removal
- Land
- Maintenance & Repairs
- List of Chattels Included in Sale
- Fire Retro Fit Letter
- Fire Safety Plan
- Annual Fire Inspection Certificate
- Blueprints of Buildings
- Capital Item Repairs/Improvements
- Environmental Phase I
- Environmental Phase II
- Environmental Phase III Hazmat Removal
- Engineers Structural Report
- Asbestos Report
- Tenant Rental Leases & Rental Applications
- Commercial Lease(s) if Any