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? curative Building? Nursing Home? Hotel/Motel? Pharmacy? Bank facility? Sports and Entertainment Arena? Other?
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 venture decision and to speculate your expected venture yield.
Tenerife Property Land For Sale
The following checklists are designed to help you conduct 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 part of prudence, activity, or assiduity, as is proper to be expected from, and commonly exercised by, a cheap and thrifty [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 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 either 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 need information 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 convenient for that intended use.
(ii) A "Financial Buyer" is acquiring the asset for the expected return on venture generated by the property's wage stream, and must settle the amount, velocity and durableness of the wage stream. A sophisticated Financial Buyer will likely speculate its yield based upon discounted cash-flows rather than the must less definite 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 asset - regularly 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 either the planned turn is character or use can be complete in a cost-effective manner. A developer conducting due diligence will focus on issues inspiring shop demand, access, use and finances.
(iv) A "Lender" is seeking to originate two basic lending criteria:
1. "Ability to Repay" - The ability of the asset to originate adequate wage 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 range in the event forced range becomes necessary.
The amount of diligent inquiry due to be expended (i.e. "Due Diligence") to explore any particular industrial or industrial real estate scheme is the amount of inquiry required to reply 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 whole fee title interest including all air possession and subterranean rights?
(g) All amelioration rights?
2. What is Purchaser's planned use of the Property?
3. Does the bodily health of the asset permit use as planned?
(a) Commercially adequate passage to social streets and ways?
(b) adequate parking?
(c) Structural health of improvements?
(d) Environmental contamination?
(i) Innocent Purchaser defense vs. Exemption from liability
(ii) All accepted Inquiry
4. Is there any legal restriction to Purchaser's use of the asset as planned?
(a) Zoning?
(b) underground 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 health on or within the asset that is likely to increase Purchaser's effective cost to regain or use the Property?
(a) asset owner's assessments?
(b) Real estate tax in line with value?
(c) special Assessment?
(d) Required user fees for principal 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 expand Term?
(c) Options to Purchase?
(d) possession of First Refusal?
(e) possession of First Offer?
(f) Maintenance Obligations?
(g) Duty on Landlord to contribute 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 building permits?
(b) Utilities?
(c) Npdes (National Pollutant removal 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 prevention Plan (Swppp) is required.
Ii. The Seller:
1. Who is the Seller?
(a) Individual?
(b) Trust?
(c) Partnership?
(d) Corporation?
(e) little Liability Company?
(f) Other legally existing entity?
2. If other than natural person, does jobber validly exist and is jobber in good standing?
3. Does the jobber own the Property?
4. Does jobber have authority to transport the Property?
(a) Board of Director Approvals?
(b) Shareholder or Member approval?
(c) Other consents?
(d) If foreign individual or entity, are any special requirements applicable?
(i) Qualification to do business 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 individual or entity, are any special requirements applicable?
(i) Qualification to do business 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. business Terms Of The Loan:
What loan terms have the Purchaser, as Borrower, and its Lender agreed to?
(a) What is the amount of the loan?
(b) What is the interest rate?
(c) What are the repayment 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 improve loan?
(g) A many improve loan?
(h) A building loan?
(i) If it is a many improve loan, can the principal be re-borrowed once repaid prior to maturity of the loan; production it, in effect, a revolving line of credit?
(j) Are there retain requirements?
(i) Interest reserves?
(ii) fix reserves?
(iii) Real estate tax reserves?
(iv) assurance reserves?
(v) Environmental remediation reserves?
(vi) Other reserves?
(k) Are there requirements for Borrower to open business operating accounts with the Lender? If so, is the Borrower obligated to articulate minimum compensating balances?
(l) Is the Borrower required to pledge business accounts as supplementary collateral?
(m) Are there early repayment fees or yield maintenance requirements (each sometimes referred to as "pre-payment penalties")?
(n) Are there repayment 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 cost repayment obligations to Lender? When are they due? What is the Borrower's enforcement to pay Lender's expenses if the loan does not close?
B. Documenting The industrial Real Estate Loan
Does Purchaser have all information principal to comply with the Lender's loan end 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 information can be obtained only from the Seller. Production of that information 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 end Checklist for a loan secured by industrial real estate.
Commercial Real Estate Loan end Checklist
1. Promissory Note
2. Personal Guaranties (which may be full, partial, secured, unsecured, cost guaranties, range guaranties or a range 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 extensive 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 society and written Operating Agreement, if Borrower is a little 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 little partnership) or Certificate of Qualification to Transact business (if Borrower is an entity doing business 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 assurance (which will typically require, for prognosis by the Lender, copies of all documents of description appearing on agenda B of the title commitment which are to remain after closing), with required industrial title assurance endorsements, often including:
(a) Affirmative Creditors possession Endorsement (extending coverage over course exclusion 7 and course exclusions 3(a) and 3(d) as they recite to creditor's possession matters)
(b) Alta 3.1 Zoning Endorsement modified to contain parking
(c) Alta extensive Endorsement 1
(d) Location Endorsement (street address)
(e) passage Endorsement (vehicular passage to social 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 recite solely to the real asset comprising the collateral)
(h) Usury Endorsement (insuring that the loan does not violate any prohibitions against inordinate interest charges)
(i) other title assurance endorsements applicable to safe the intended use and value of the collateral, as may be determined upon recite of the Commitment for Title assurance and scrutinize or arising from the existence of special issues pertaining to the transaction or the Borrower.
11. Current Alta scrutinize (3 sets), [typically prepared in accordance with 2005 Minimum accepted information for Alta/Acsm Land Title Surveys, certified to the lender, Buyer and the title insurer, including items 1 straight through 4, 6, 7(a), 7(b)(1), 8 straight through 11(a) and 14 from the Surveyor's "Optional scrutinize 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 simply as "Sndas"].
16. Ucc, Judgment, Pending Litigation, Bankruptcy and Tax Lien search Report
17. Estimate (must comply with Title Xi of Firrea (Financial Institutions Reform, saving and enforcement Act of 1989, as amended)
18. Environmental Site Estimate description (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 assurance naming Lender as the Mortgagee/Lender Loss Payee; and Liability assurance naming Lender as an "additional insured" (sometimes listed as simply "Acord 27 and Acord 25, respectively)
22. Legal concept of Borrower's Attorney
23. Credit 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 useful to come to be 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 inspiring and high-priced in all events.
If the loan requirements cannot be satisfied, it is good to make that determination 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 scrutinize all material facts and conditions affecting the asset and the transaction is of principal 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 business use or for venture is impacted by numerous factors that may influence its use and value.
The existence of these factors and their influence on a Purchaser's ability to use the asset for its intended use and on the Purchaser's projected venture yield can only be discovered straight through diligent investigation and concentration to detail.
The circumstances of each transaction will settle what degree of diligence is required. The level of diligence required under the circumstances is the diligence that is due.
Exercise Due Diligence.
Due Diligence Checklists - For market Real Estate Transactions