1. Defining Due Diligence (5 mins)
a. The process of investigation, performed by investors, into the details of a potential investment, such as an examination of operations and management and the verification of material facts.
b. Webster’s Dictionary: Research and analysis of a company or organization in preparation for a business transaction (as a corporate merger or purchase of securities)
c. Discussion on who owns due diligence? The seller or buyer? Is it negotiated and what examples have brokers experienced?
d. Looking at a list of due diligence items and what the broker is investigating
2. Researching Mortgages on Income Property (20 mins)
a. The broker’s research and due diligence for the buyer or seller in commercial could be consulting or as a process of listing a property
b. The information that should be researched and relevant to a buyer that a broker could be performing
c. A listing broker wants to know the seller’s/owner’s obligations under the mortgage prior to listing a building and if there are penalties for selling prior to a mortgage terminationd. A broker should review for mortgage constraints such as:
1. Yield-Up Maintenance or Due On Sale Issues
2. Default or acceleration issues
3. Assumption benefits
4. Research of any penalties that a seller’s lender may impose on the sale of property
3. Researching the Owner’s Title (10 mins)
a. The broker’s research of title to confirm ownership with on-line resources such as the Registry of Deeds
b. Succinctly identify any liens on the property such as tax lien, environmental liens, mechanic’s liens, etc. that can found on the title
4. Researching the Property at Town Hall (25 mins)
a. During broker’s due diligence listing a property or representing a buyer, the following cursory research can be conducted:
b. Research the zoning at the town planning dept. and identify allowed and prohibited uses or special permit uses
c. Research Conservation Commission for the 100 year flood plain map and zone number and the location of the property within the flood plain
d. Research that the property has town water, town sewer or septic system at the Water/Sewer Dept. to share with buyers
e. Research Board of Health for size and capacity of septic system for total number of occupants allowed in a property that can affect a buyer’s decision on a specific property
f. If septic, research last pumping of system at the Board of Health and its compliance with Title V
g. Investigate at Fire Dept. for any underground tank permits (entering or exiting) that could affect the price of the property or compliance issues. These are negotiating items as it relates to removal and cost
h. Research the real estate tax assessment, tax rate and if the taxes have been paid to date
i. Research the Building Dept. for any permit moratoriums or other filings that might impact the neighborhood
5. Establishing the Factors of the Physical Asset (25 mins)
a. Information check list that a broker should research and collect for commercial
b. Inspect and tour a building for its building characteristics, utilities, land area, etc.
c. A physical review and tour of the nature of the building and the condition of the property. Are there any obvious replacement issues?
d. Identifying possible physical maintenance issues and costs that a buyer is certain to ask or items you are required to disclose as a physical defect
e. If investment property, identifying any market and leasing design considerations that might hinder or enhance the leasing of the building (if investment property) for the buyer in the future
f. Discussion on seller wanting indemnification from buyer on any due diligence on a property. Evidence of insurance with a Certificate of Insurance Binder.
6. Conducting Lease Abstracts and Evaluation Liabilities (25 mins)
a. Information that a broker should review in a lease to summarize in an abstract: Commercial and Multi-Family
b. Such items include: Parties, Term, Space, Address, Rent, Options, Renewals
c. What are the Penalties; holdover, termination clauses, death clause, default language, etc.
d. Broker should conduct research on market rental rates or sales prices and evaluating effective rental rates to the building’s contractive rents that a buyer will want to understand
e. Are the market effective rents lower or higher than the building rents?
f. If lower, then there is recalculation of the Net Operating Income (NOI) and thus an impact on financing vs. equity amounts and the impact to the investor
7. Environmental Issues (10 mins)
a. Items that a broker should review and the recommendation of outside expertise
b. How environmental issues affect contingencies in a letter of intent or Offer to Purchase and how a broker should incorporate such environmental contingencies in a letter of intent
c. 21 E inspection as a contingency for due diligence. Is the seller responsible to conduct and provide a 21E report. If not, then who determines responsibility and ownership? If the buyer backs out of a transaction, what are the business practices for ownership of the environmental due diligence?
d. Business practice is for buyer to conduct a 21E report for its lender and title insurance company
e. The environmental issues that affect the buyer’s determination of value
f. The costs related to each issue for removal or remediation and the future liability
g. The costs impact to the “current market value” of investment real estate
h. The impact of environmental costs to the appraised value using the Sales Approach
i. The impact of environmental issues to the highest and best use of a property or land
j. The buyer’s broker due diligence of tenant leases for environmental responsibility and future liability
k. Identifying the financial strength of tenant to comply with any environmental lease responsibilities
l. Title V and impact on total water effluence or people capacity in a building, house or multi-family
m. The negative impact Title V can have an occupant’s capacity and the highest and best use of a property
n. Wetlands and its impact on expansion of a house or commercial building, parking lot, driveway, septic system, and impact on valuation or exit strategies.
o. Discussion on the ownership of 21E reports and who is entitled to keep the information