The Due Diligence Process Plan Handbook for Commercial Real Estate Investments

Brian Hennessey

Description

This handbook was created to save investors time and money, create additional value and to avoid the potential pitfalls in purchasing commercial real estate, as well as give an overview of the due diligence process. If you're an investor looking to buy a triplex, an industrial building or a shopping center; a property/asset manager helping a client to purchase properties or a real estate broker looking to add to your knowledge base to help clients to invest, this information will be invaluable. It is written in a concise pragmatic fashion as a real due diligence tool and is not intended as a voluminous textbook of information on the subject. It is based upon over 28 years of experience in the commercial real estate business and acquiring over 9 million square feet of office properties, from private and institutional owners. The information it contains is applicable to all commercial real estate investments. The fundamentals remain the same whether you're buying apartment rental units, shopping centers or skyscrapers. We need reminding as much as we need learning. There are many different aspects of an investment that require investigation. You need a reference tool to help you to remember the questions to ask, the places and problems to look for, and where to uncover the various potential trip wires and booby traps that can possibly cause you issues, as well as money, after you purchase the property. That's why I originally wrote this reference book for my own benefit. There are just too many things to remember off the top of your head. I still refer to it regularly.

Sujets

• Real Estate
• Employabilité, métiers et formations
• Commercial
• Economics
• Business

Informations

• Publié par: eBookIt.com
• Date de parution: 02 septembre 2013
• Nombre de lectures: 0
• EAN13: 9780615719634
• Langue: English

Extrait

Due Diligence
by Brian Hennessey
EPUB Version


Copyright 2013 by Brian Hennessey. All rights reserved. No part of this book may be used or reproduced in any manner whatsoever without written permission. For information, address Colliers, 601 Union Street, Suite 4800, Seattle, WA 98101
USA. Or call us at Tel: [phone]. Please visit: www.colliers.com

This ebook is licensed for your personal use only. This ebook may not be re-sold or given away to other people. If you would like to share this book with another person, please obtain an additional copy for each recipient. If you're reading this book and did not purchase it, or it was not purchased for your use only, then please obtain your own copy. Thank you for respecting the hard work of this author.
Table of Contents
Chapter 1 During Negotiations of Purchase & Sale Agreement
Chapter 2 The Purchase & Sale Agreement Is Executed
Chapter 3 Other Critical Issues That Must Be Explored
Chapter 4 Energy Savings, Cost Cutting Tips and Other Items
Chapter 5 Mechanical and Physical Inspections
Chapter 6 Review of Property's Books and Records
Chapter 7 Underwriting and Financial Analysis
Chapter 8 Heading Towards the Finish Line
In Conclusion
Exhibit A: Sample Lease Abstract Form
Exhibit B: Due Diligence Checklist
Exhibit C: Due Diligence Document Checklist
Exhibit D: Sample Tenant Questionnaire Letter
Introduction

This handbook was created to save investors time and money and to avoid the potential pitfalls in purchasing commercial real estate, as well as give an overview of the due diligence process. It is written in a concise pragmatic fashion as a real due diligence tool and is not intended as a voluminous textbook of information on the subject. It is based upon over 27 years of experience in the commercial real estate business and acquiring over 9 million square feet of office properties, from private and institutional owners. The fundamentals remain the same whether you're acquiring residential rental properties, an industrial building, a skyscraper or a shopping center. Many of these lessons covered here were learned the hard way.
There are two ways to learn; from your own mistakes or from others mistakes. It's always easier and cheaper to learn from others mistakes. I am hoping this handbook will be a useful tool from which investors can avoid mistakes in the due diligence process and gain a better understanding of the salient due diligence issues. Some of the ideas and proven tips could easily save an investor tens of thousands of dollars. Each and every time you purchase a property, a unique set of circumstances presents itself - the owner, tenants, building construction, etc - as a learning experience that you can add to your own knowledge base. I only wish I could have had this information available when I first started out purchasing properties. Just the cost cutting tips alone are worth thousands of dollars.
The whole purpose of the due diligence process is to discover the potential problems with a property, reveal any hidden profit potential, and to verify all information that you have obtained. All this "intelligence" will enable a buyer to make an informed decision on whether to move forward, or not, with an acquisition. In short, a thoughtful due diligence process will afford the buyer confidence that once the acquisition is complete, there will be no material surprises. It is vitally important that everyone on your due diligence team is on top of their particular assignment in the process and that communication lines are open to everyone on the team.
The due diligence process is only one aspect of the commercial real estate purchase transaction, but it is of fundamental importance. For beginning investors, this handbook will provide a useful and efficient resource to cutting through the minutia and focusing on the important issues as well as providing a number of cost savings and money making tips. And for seasoned pros, there will be golden nuggets to help refine their due diligence practices as well as provide a proven framework in which to complete the examination.

Brian Hennessey
Chapter 1
During Negotiations Of Purchase & Sale Agreement

Hopefully, you have chosen a detailed oriented, deal making attorney (as opposed to a deal breaking one), that will help to resolve issues and work through problems creatively, as well as find and point out potential pitfalls. It is critically important that you and your attorney are constantly communicating and are on the same page. Also, you must feel comfortable and confident in their abilities to negotiate and focus on the important issues (and to not waste time and money on immaterial issues).

If you haven't chosen a reputable real estate attorney, make sure that you do your due diligence on them before you choose them to represent you. Ask them for references, specific to the type of transaction you plan to be working on with them and about their past experience. Having a good, competent attorney on your team can save you countless headaches and significant money. Do not skimp on this cost, because you do get what you pay for. Many times you're better off hiring a senior attorney and paying more money per hour, than a less experienced, less expensive attorney, who will sometimes be learning on your dime, so to speak.

As you're negotiating the purchase and sale agreement you want to have all the leases and operating expense statements (year to date as well as past three years) sent to you to start reviewing, if at all possible. Many times the seller is unwilling to hand these over until they have a signed agreement, but if you don't ask the answer is always no. First and foremost you want to see if there is anything in the leases that would prevent you from moving forward on the acquisition.


Review Leases and Create Lease Abstracts

Look for any outstanding issues that may affect the leases such as: a cancellation/termination provision; buyout provision; a reduction of space provision; or any other issues that could impact the "value" of the lease.Immediately address any major issues with the seller or their broker to find out if they are aware of any information that could shed further light on the issue(s).

Confront the outstanding lease issues immediately and try to resolve them so as to not spend unnecessary time on a transaction that has unsolvable problems and issues.Time is better spent on "doable" deals.

This will give an indication as to what issues are going on in the building, i.e. HVAC, plumbing, security, etc. and which tenants you need to really be speaking with.The ones who are writing the current landlord will most likely be forthcoming when it comes to telling you what's "wrong" with the building. This will most likely be done during the time when you are at the building conducting the tenant interviews, after the purchase and sale agreement has been fully executed.

When reviewing a lease document, be sure you are aware of and note in the lease *abstracts the following:

Look for any rental concessions, i.e. free rent; beneficial occupancy (where tenant can occupy the space rent free for a certain period of time).Be aware of how rental abatements are granted in the lease, i.e. base rent and/or plus operating expenses. Also note, in many cases, unused tenant improvement allowances can be applied as a rental credit.

Tenant improvement dollars owed to tenant or landlord.

Renewal and/or expansion and/or contraction options (make note of any option terms in the lease abstract).

Caps on operating expense pass-throughs.

Fixed option(s) to renew rental rates (this could negatively impact the future value of the property).

Property tax increase protection (Prop. 13 in California).

Look for any operating expense exclusions that will impact the financial analysis negatively.For example, the simple exclusion of the word "property" before taxes could prevent you from collecting the overage amount of tax increases over the base year or at the very least make it difficult to collect and force you to consider litigation and all its uncertainties and costs.

Early termination or cancellation provisions.

Refurbishment allowances.

Special allowances for after hours HVAC or electrical usage at no charge to tenant.

Building hours (outside of the norm).

Special computer room A/C requirements.

Security requirements.

Any other landlord expense that may be incurred.

If the lease requires a "Lease Commencement Letter", be sure there is one executed by the tenant to verify commencement date; expiration date and rental increase dates.

Confirm all the amendments are accounted for and that any changes from the original lease are understood and verified, if necessary, i.e. reduction of square footage; change of termination date; etc., and are fully executed.

Verify all security deposits and/or letters of credit (and make sure they are transferred at the time of closing with proper signatures).

(*See a form lease abstract attached as Exhibit A)


Review All Service Contracts

Make sure you receive all the current service contracts that are in effect at the building including, but not limited to:

Elevator Maintenance Contract

Roof Maintenance Contract

HVAC Maintenance Contract

Interior Plant Maintenance Contract

Landscape Maintenance

Piped in Music Service Agreement

Janitorial Service Contract

Parking Company Contract

Trash Removal Contract

Property Management Contract

Pest Control Service Agreement

Hazardous Waste Removal Service

Security Service Contract

Metal & Stone Maintenance Service Contract

Property Taxes Appeal / Property Tax Consultant

Utilities Contract

Union Contract (if there are any union contracts, make sure that you understand if they are to be continued, which will result in higher operating expenses, and the cost is accoun