Due Diligence Commercial Property

[David Cielak]

Help please....this is my first post....
Have just had an offer accepted on a commercial (office) property, my first such property, and now it is due diligence time. Has anyone seen or do they have a "checklist" so that I can make sure I cover all the bases?

Many thanks.

DC

[Mike]

Hi David,

The way you worded your post suggested no due diligence was performed prior to the offer. I'm sure that is not the case so could you provide details of your due diligence prior to the offer?

Regards, Mike

[David Cielak]

Hi Mike
Yes you are right. I briefly inspected the building and land which is currently in the 20th month of a 5 year lease with a 5 year option. I was already familiar with the building...it's now leased to a Commonwealth Dept....the fitout is a very good quality job.
The numbers indicate a 10.6% net yield. I'll be having my lawyer reviewing the lease, the accountant on the depreciation schedule, and I will get the building and AC generally inspected...but it was purpose built for the CES to Commonwealth standards about 10 years ago so it should be in reasonable shape. I believe I need to verify the actual outgoings expenses to ensure the yield is accurate and have about 30 days to do the rest of the due diligence. Anything else to consider?

Regards

DC

[paulzag]

I used to have a checklist but it would probably be out of date.

Your lawyer should be able to assist with a checklist if they have experience with commercial property. If they don't have experience why are you using them?

How did you come up with a suitable offer if you hadn't done your due diligence? DD is the process of assessing value and risk in an investment, surely the price is relative to your valuation.

Here is a list of things off the top of my head
[list=1]
Copies of all documentation: Leases (current and expired); insurance policies, claims histories and certificates; planning approvals, DA's for current use.
Financiers requirements (these can be extensive).
Major points of the existing lease (not just who pays the outgoings and refurb expenses -- beware the state of the space on vacating).
Environmental report (any contamination?) Asbestos shouldn't be an issue
Capital spending requirements estimate over the next 5, 10 and 20 years. This is where you allocate your sinking fund.
Structural maintenance requirements on building and works
Cashflow analysis: IRR, ROI, ROCE, Cap Rate.
Ownership structure
Compliance report WRT Workcover OH&S, EEO, EPA, LGA, Fire ordinances (and sprinklers), Water, Sewerage and Electrical. Don't forget disabled access.
Roof, lifts, escalators and A/C condition
Confirm floor space - maybe get a survey or indemnity. Look out for easments, rights of way, encroached boundries and overhangs.
Approvals for all signage and external advertising if any.
Building modifications report. Watch out for changes to allow computer rooms and cabling.
get a set of building plans. Then get them reviewed by someone who knows what they mean (did they build what's on the plan).
Evaluate public liability and various indemnity insurances required
[/list=1]

Hope this helps. I wouldn't put too much faith in Commonwealth standards for building though.

Good luck and regards

PaulZag
Dreamspinner

[bundy1964]

Just a thought

In Adelaide gov departments have a history of selling off their buildings on leases and rebuilding for when the lease expires :(

I would also sugest you take a good look at any opt out clauses they have in the lease.

Also if there is a managing agent is there fee covered by the outgoings?

[Jakk]

G'Day David,

Just a little concern here, you mentioned that the building was purpose built for use as a CES office.

From what I know, the CES changed its name to Employment National and from further information, I understand that Employment National will cease to exist in July next year.

Would your tenant by any chance be Employment National?

regards

[Bobq]

The Commonwealth's property strategy is to set a hurdle rate, value the potential sale price of the building, the expenses of maintaining and local rental rates in the area. If the building fails to meet the hurdle rate, it sells. Newspapers report that the Russell Hill complex which houses Defence HQ is to go.

The Commonwealth has flogged off quite a lot of its property now, although I wouldn't expect too many bargains.

Renewal of the option is not a gimme by any means, but the Commonwealth is hardly likely to default on a lease even if the agency is disbanded.

[David Cielak]

Thanks for the responses....

I just twigged that there were no management fees shown in the outgoings.

The checklist that Paul provided is a pretty good starting place...I have 30 days to be fully satisfied with my own due diligence enquiries and show finance approval or the offer lapses.

It's not an employment national office (they are going out of business) and it's a private vendor.

I have had a very quick look at the lease and the specs on such things like AC seem very stringent...air flow rates...and other stuff.
Will be going through the lease and requesting records and such of the vendors in the next few days?

A general question...what and how much do you ask for from the vendors ...and what will they reasonably give to you? Can you ask for all related documents and plans?

Your comments are all appreciated.

Regards

David Cielak

:)

[paulzag]

David

Ask for everything. Including bank statements if you think it's relevant. Be specific.

If the vendor says no to anything you have to decide if they are hiding anything or if it's worth walking away (or will they let you walk away).

Get them on the hook then triple check everything. This is the cut and thrust of deal making.

Alternatively just pay their asking price if the deal looks ok at a glance. You can't possibly catch everything.

If you decide to haggle, remember to go back over stuff they'd thought was settled before your 30 days runs out.

Regard and good luck

Paul Zag
Dreamspinner