Friday, December 4, 2015

#CRE Due Diligence - Look into it!

Image Attribution: www.screen.yahoo.com
Some of you are old enough to remember the Saturday Night Live Weekend Updates with Kevin Nealon.

Occasionally, David Spade would give a brief Hollywood gossip minute and use the line of "...look into it!"

While discussing every Hollywood loser believing they had a shot at dating Michelle Pfeiffer, David said "you don't, it's called reality...look into it!"

Well, believe it or not, there is a commercial real estate parallel. It's known as due diligence...look into it! I love the double entendre also.

So what exactly is commercial real estate due diligence, and why should you care?

In short, due diligence is a period of time, within a purchase contract, that you as the buyer, are allowed to study the property you are buying. Generally, this period of time is "free" - meaning that if something is not as represented, you can walk away with no obligation.

Certain things in your assessment are a given - does the property meet your needs as an occupant? Can you qualify for financing? Will the property appraise at the price that you have agreed to pay? Is there any environmental contamination lurking beneath the soil?

Other elements of the purchase are not as clearly defined - what is the condition of the roof, air conditioning, truck doors and pavement? Will the city allow you to operate in the building without any special permitting? Are the offices in the building built to code? Does the path of travel from the street to the building conform with the requirements of the American with Disabilities Act (ADA)?

The onus is upon you as the buyer to understand what you are buying. In most purchases of commercial real estate, the seller does not warrant the condition of the property and sells the property to you in the property's "as-is" condition. Consequently, you must have a proper structure of your due diligence to insure that you don't get stuck.

I would recommend that you consider the following things to make sure that you have the ability to "look into it".

Time frames: Loan approval and the components of that approval - appraisal, environmental, financial take time. In most instances, 45-60 days - if you and your lender are in sync and you provide your lender a complete package of information for your loan approval. Make sure that your agreement with the seller allows you adequate time for your loan approval and that you can extend the time frame if needed. While your lender is crunching the numbers, the appraiser is scouting the market for comparable sales, the enviro engineer is reviewing the records of previous hazardous uses; you and your team can busy yourselves conducting the balance of the investigation.

Responsibility: Ultimately, the responsibility of analyzing the purchase is yours, but you will want to engage a bevy of consultants to provide reports for you. Your lender will generally hire the appraiser and environmental engineer. But, I would suggest that you have a commercial building inspector check out the building. You probably will want your lawyer to review the title report and discuss with you the most advantageous ownership entity for you. If you are planning to make changes to the building, an architect's guidance is invaluable. The architect can also help you with city permitting and ADA path of travel concerns. Building those new offices or adding a truck loading dock will require a licensed general contractor. Team with one early - maybe have the contractor check out the condition of the building for you as well as the commercial inspector.

Recourse: Typically, you conduct your due diligence - loan, property condition, title, permitting, etc. and conclude that you are a go or no go for launch.  Make sure that your agreement allows you to cancel the sale, for free, if something is amiss - the property is environmentally contaminated, cannot be financed, is too expensive to improve, or the city will not allow you to occupy the building with your use.