After the Company and Seller sign a Purchase and Sales Contract, the Due Diligence period begins to determine whether the property is suitable or not. The Company intends to follow the items below to determine the suitability of the property. However, each real estate property deal is unique, and it may require additional due diligence items not shown in this list.
Proof of Property’s Income and Expenses, Leases:
Analysis of the Leases to confirm that there are no undisclosed, extraordinary obligations or unexpected liabilities, and prepare the Company to assume ownership of the leases and manage the property consistent with the terms of the leases. We want to know and review: (i) all ongoing evictions or legal matters pertaining to the property; (ii) all tenants relevant information such as lease applications, photo identification, financial and background checks, security deposits documents, bank statements copies; (iii) previous years profit & loss statements, IRS tax returns, bank statements, rent rolls, T-12 trailing twelve financials; (iv)proof of expenses documents for property taxes, insurance, electricity & gas, water & sewer, garbage, payroll & payroll taxes, repairs & maintenance, property management fees, and miscellaneous
Property Insurance:
The review depends on whether the policies are being assigned to the Company or being canceled at closing. If canceled at closing, the review is limited to determining that the Company’s interest is protected during the contract period. If the policies are being assigned, they need to be reviewed as if the Company were acquiring the polices new. However, the Company’s primary objective is to get brand-new insurance policies that make sense financially and in terms of insurance coverage.
Additionally, the Company will investigate of any past insurance claims or related litigations related to the Property. This investigation can tell us more about past damages and repairs done to the property.
Existing and New Debts:
The Company’s primary objective to get a new mortgage with better terms, unless the existing mortgage has great terms and can be assumed, the Company is open to explore this option. On this section of the checklist, the Company needs to investigate the existing mortgage principal amount due and current terms with the existing lender. Additionally, there are other debts that can be attached to the property that needs investigation. The Company along with its real estate attorney will ensure that existing debts on the property will not create a liability to the Company when the title is transferred. We want to make sure that existing debtors are paid or new terms/contracts are signed with those debtors regarding existing debts.
Title Review:
Obtain a title commitment document from the title company; which is the title company’s promise to provide title insurance, as well as an explanation of any terms, conditions, exclusions, requirements, and exceptions. Also, a title search is performed to check for public records to ensure chain of title, all existing liens, loans, child support, judgments, claims, easements, encumbrances, restrictions, etc, attached to the title are disclosed and dealt prior to closing. If potential issues are found, the Company along with its real estate attorney will analyze the severity of the issues and possible cures, and the Company will decide to either proceed or cancel the contract. We want to make sure the title is free and clear from any legal issues before it is transferred to the Company. The Company shall review covenants, conditions, restrictions, easements – benefiting and burdening the property.
Survey:
Obtain a latest survey to review in relation to title commitment and conformity to legal description of the property. We are looking to get an analysis of the actual boundary lines and the true corners of a parcel of land, all of which hopefully match the metes and bounds description in the vesting deed. The Company needs to investigate encroachments or boundary line conflicts, unclear boundary line, discrepancies with other recorded or known surveys or plats, differences between measured and platted distances, strips, gores, overlaps and contiguity issues
Service and Maintenance Contracts, Other Agreements:
Request to the Seller list and copies of all service and maintenance contracts, and other contracts or agreements affecting the Property. The Company will review legal and financial terms, and determine the obligations if contracts will be assumed. After review, the Company will decide which contracts desires to be terminated or assumed at Closing. For those terminated, the termination rights and procedures need to be learned. For those to be assumed, they need to be reviewed as if the Company was entering into them new and to determine the procedures for assumption and possible amendments. For those that are neither terminable nor assumable, negotiations have to be entered into or the legal consequences for breach explored.
Guaranties and Warranties:
Guaranties and Warranties are usually and the Company will request to the Seller lists and copies of all documents. The Company will review assumption procedures and possibly deal with any pending claims.
Taxes and Assessments:
The Company will check the tax assessment which includes the classification, valuation, verification of assessor’s information, and any pending protests. We will request a tax certificate to check for tax payments, check for: any special assessments, transfer taxes, special taxing districts, tax liens.
Property Management Agreement:
Per Purchase and Sales Contract, multiple third-party property managers are required to bid on the property which are willing and capable to manage the property. If by any chance, a property management agreement cannot be reach between the Company and third-party property manager, the Company has the right to terminate the Purchase and Sales Contract. The Company wants to ensure the chosen third-party property manager signs an agreement with fair terms requested by the Company, regarding the management of the property to avoid any future misunderstandings. Also, the Company wants to have after acquisition back-up options from other property manager bidders, in case either the chosen third-party property manager or the Company decide to terminate the property management agreement by any reason. Additionally, multiple property managers bids provide more set of eyes and opinions to help us with the due diligence period and assess the suitability of the property
Building and Zoning:
The Company needs to review that the current and intended uses of the property are lawful under building codes and zoning laws and that there are no legal labilities associated with the property. We need to make sure this does not lead to liability in excess of the value of the property or the financial resources of the Company. We should confirm conformity with buildings and fire codes (and obtain letters if possible); check building and fire department notices of violation; check if there are any open permits, and obtain certificate of occupancy. We should confirm zoning compliance (get zoning letter if possible); compliance with local master plan, regulations to water and sewer service, check for any pending applications or proceedings. Also, we should look for subdivision requirements met and for annexation agreements, plat notes, subdivision improvements agreements and the like.
Permits and Licenses:
The Company shall determine permits and licenses required to keep the property operating. Some permits are not transferable and need to be reissued upon the transfer of the property. During this investigation, we should identify the procedures (including the time period) neccesary to obtain new permits or licenses. We should obtain and review permits or lincenses for: Buildings and building systems, access, environmental, special activities, to conduct business, to use land, etc. We should strongly consider the transferability, duration, revocability, conditions, obligations, defaults related to permits and licenses for the property
Environmental Reports:
Liability under federal, state and local environmental laws can be significant, far in excess of the value of the property or the resources of the Company. Mere ownership without culpability can lead to liability. The Company should investigate for potential exposure to liability for cleanup of the property and/or natural resource damages under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), the Resource Conservation and Recovery Act (“RCRA”), the Federal Water Pollution Control Act (the “Clean Water Act” or “CWA”), Oil Pollution Act (“OPA”) or other federal laws, state laws or common law theories.
Phase I Environmental Site Assessment should be performed, which is a review of all the records, documents and historical uses applicable to the site or property, backed by a site visit by an appropiate environmental professional. Depending of the contents and findings of this report, the Company may decide to terminate the Purchase and Sales Contract, or move forward with the purchase of the property, or perform a Phase II Environmental Site Assessment. The Company will study the rewards and cost of these three options before making a decision.
We want to know and review: (i) if the property is in compliance with permit requirements, and the requirements of federal, state, and local environmental laws and regulations; (ii) if there any pending or threatened environmental enforcement actions against the property; (iii) have state, federal or local environmental inspections been performed at the property in the past; (iv) the history of ownership and operations, including prior uses and activities; (v) any other environmental contaminant or problem, etc
Physical Inspection:
The Company will assess the structural condition of the property, as not having an evaluation of the current condition of the structural members of the property can lead to buying a property that will need expensive structural repairs in the future. The inspection requires an evaluation of items such as: (i) Foundations, walls, columns, beams, roofs, other structural members; (ii) central heating, central cooling, plumbing, well, camera sewer lines, wood destroying insects, electric & mechanical systems, other building systems (i.e. elevator), windows, ceilings, floors, appliances. We want to know and review: deferred maintenance, compliance with building and fire codes, engineering reports, mechanical reports (including HVAC), roof & asbestos reports, existing plans and specifications, flood plains, parking areas condition, inspect nature of the land (obtain and review soils reports), special hazards (noise & vibrations, toxics & chemicals, high winds, others).
The Company will begin with the “most time & cost effective due diligence items” first before moving to the “most time consuming & costly due diligence items”. This will mitigate everyone’s economic risks by allowing the Company to terminate the Purchase and Sales Contract if the property does not pass the first simple steps of the due diligence items. At the same time, it will save everyone’s time and money, and the Company can move forward to the next opportunity.
EXHIBIT A
Note: The Purchase and Sales Contract has clauses throughout the document asking the Seller to provide information related to Due Diligence items. Additionally, the Purchase and Sales Contract contains Exhibit A, as shown below, which is a numbered list of the items/documents the Seller shall provide.
DUE DILIGENCE DOCUMENTS
In addition to the items requested throughout this Contract, Seller agrees to deliver or make available to the Buyer within ______ business days after the Acceptance Date; complete and legible copies of the following pertaining to the Property, to the extent in Seller’s possession or readily available to the Seller:
(1) A detailed current inventory of all tangible personal property and fixtures owned by Seller and located on, attached to, or used in connection with the Property, to be sold with the Property;
(2) All service, maintenance, management, or other contracts relating to the ownership and operation of the Property;
(3) All written warranties and guaranties;
(4) The real estate and personal property tax statements for the Property for the previous three (3) calendar years and the current calendar year-to-date, and copies of any notice of change in assessed value or tax rate for the Property as well as information regarding the progress of any ongoing real property and personal property tax protests concerning the Property;
(5) Copies of all utility bills for the Property for the current billing cycle period and for the past thirty-six (36) months, and copies of utility or service agreements currently in effect at the Property;
(6) The most recent City Property Inspection report, if any;
(7) Copies of any written notice of any uncured violations received by Seller from any federal, state, or local governmental authority or agency related to the Property during the past three (3) years;
(8) Copy of current Certificate of Occupancy for each of the building(s) on the Property, and copies of all other licenses and building permits required by applicable law to own, operate, manage and maintain the Property;
(9) Copies of any existing oil and gas leases currently in effect;
(10) Copies of any environmental, pest and termite, structural, mechanical or engineering reports in Seller’s possession prepared by third parties with respect to the property (unless the report is not permitted by the author to be provided and Seller has not been able to obtain permission from the author despite Seller’s reasonable efforts. Seller’s reasonable efforts shall not include the payment of additional fees; however, if the author of the report demands additional fees the Seller agrees to give Buyer the opportunity to pay such fees in order to obtain a copy of such report). Seller makes no representation or warranty whatsoever with regards to any such report, including, without limitation, its accuracy or completeness;
(11) As Built plans and specifications for the Property;
(12) Copies of any Site Plans;
(13) The most recent rent roll and monthly rent rolls for the past thirty-six (36) months; including names of tenants, rents, security deposit schedule, expenses paid by tenants and by Seller, commencement dates, terms of leases, and all other pertinent data for the Property certified by Seller to be true, correct and complete in all material respects;
(14) To the extent not already contained in the rent rolls under subpart (13) above, Delinquency and Prepaid Rent Report(s);
(15) To the extent not already contained in the rent rolls under subpart (13) above, Collections & Vacancy History for the past thirty-six (36) months;
(16) List of on-site employees and a description of any on-site living arrangements;
(17) Copies of marketing materials;
(18) Tenant leases and tenant files will be made available for review and copying (at Buyer’s expense) at the office of Seller’s Property Manager. The tenant files shall include all modifications, supplements or amendments thereto;
(19) True, complete and correct copies of all Commercial Leases, currently effective letters of intent with prospective tenants, brokerage commission agreements, and other agreements related to the leasing of the Property, including all modifications, supplements or amendments to each of the foregoing. Seller will also permit Purchaser access to the tenant lease files at the office of Seller’s Property Manager;
(20) Income and expense statements for the Property covering the previous three (3) calendar years and current year to date, certified true and correct in all material respects (specific lender requirement);
(21) To the extent not already contained in the income and expense statements to be delivered under subpart (20) above, a list of all capital expenditures incurred during the previous three (3) calendar years and the current calendar year-to-date together with the budget for any contemplated in the future;
(22) Monthly bank delivered or bank prepared statements reports for the past thirty-six (36) months for all checking and savings accounts that relate to the Property;
(23) Copies of previous three (3) calendar years of IRS income taxes reports
(24) Copies of deposit slips for the past six (6) months;
(25) Copy of the most recent loan payment coupon or statement for the Existing Loan;
(26) Copies of insurance certificates for all fire, hazard, liability, and other insurance policies maintained by Seller for the Property; and
(27) Insurance Loss Runs for the past five (5) years and year-to-date.