Due Dilligence Commercial Property

As you promote, sell and then document the property transaction you will soon come across the fact and event of ‘due diligence’. This element of the commercial real estate sale is very common and will be the subject of most contracts with the exception of the auction method. As you would expect the process of due diligence can make or break a sale. For this reason it is wise to question a seller well in the listing stage of the sale to ensure that no ‘deal breakers’ or problems are hidden in the cupboard. Due diligence will likely find most problems on and with the property.

As you promote, sell and then document the property transaction you will soon come across the fact and event of ‘due diligence’.

This element of the commercial real estate sale is very common and will be the subject of most contracts with the exception of the auction method. 

As you would expect the process of due diligence can make or break a sale.  For this reason it is wise to question a seller well in the listing stage of the sale to ensure that no ‘deal breakers’ or problems are hidden in the cupboard.  Due diligence will likely find most problems on and with the property.

So what can be looked at in ‘due diligence’?  Consider these:

  • Due Diligence is simply a detailed checking process that is undertaken prior to sale and settlement by ‘experts’, to review all relevant data involved in the sale. 
  • Usually solicitors and/or audit specialists are the nominated parties to undertake the work on behalf of the purchaser.
  • The concept of Due Diligence is that the sale and settlement of the property will only occur if the Due Diligence process is successful. 
  • On large commercial properties it is not unusual for Due Diligence to continue for days if not weeks.  A special condition of the contract will allow this to occur.
  • The process is undertaken under the strict control of the Seller. It usually occurs in the Seller’s property management office or at the Sellers solicitor’s offices, and is usually in a controlled environment (locked room).  Only authorized parties are allowed into the room so as to preserve security and confidentiality of documentation.
  • A good Agent or Broker will provide total support to the Due Diligence activity.  Expect Due Diligence to check just about everything involved in the sale.

The five professional areas usually covered are:-

  • Engineering
  • Environment
  • Finance
  • Legal
  • Management

Expect questioning and document discovery to include the following:-

  • Engineering:  Includes verification that the property structures and building services comply with the Building Code of Australia and Local Government building Approvals.  Questions will cover safety risks or non-compliance of structures, fire protection, air conditioning, electrical supply, hydraulics, lifts, escalators, and stand-by emergency power.  Expect the questions to involve adequacy of structures, mandatory service compliance, remaining life expectancy, capital expenditure, and sinking fund requirements for future major repairs or replacements.
  • Environment:  Includes a wide range of issues such as identification and analysis of environmental and physical risks to the property or land and its use.  Issues will include site contamination, dangerous goods and hazardous substances, asbestos, hazardous industrial waste, trade waste, storm water management, occupational health and safety, heritage factors, and statutory requirements.
  • Finance:  Includes all actions and dealings associated with property financing, review of taxation implications, substantiation of income and expenditure statements, arranging mortgages, financial analysis and modelling, company or entity investigations, plus all other supportive or related documentation.
  • Legal:  Includes all conveyance documentation, easements, permits, titles, contracts, leases, searches, incentives to tenants, site details, compliance with any legislative requirements, outstanding litigation, and any town planning issues.
  • Management:  Looks at any issues associated with ongoing asset management, facilities management, building management, lease management and negotiation, rent collection, arrears, financial reporting, insurance, car-park supervision, cleaning, pest control, landscaping etc. 

Tenant Mix in Shopping Malls

How and where to put tenants in a shopping centre or mall is critical to the rent and the growth of the property.

Tenancy mix becomes very important in retail premises and properties of multiple tenants; that will be shopping centres of all sizes and types.  A property that does not reach the needs or interest of a customer is going to fail.  (NB – you can get more free retail tenant mix training in ‘Snapshot’ right here)

A customer wants to be well served in their shopping needs and feel good about it when they visit your property.  Visit the competition shopping centre properties nearby to compare them to that which you are currently leasing.  You must understand the other properties that you are competing against together with the strengths and weaknesses that they experience.

In reviewing these other properties you look at things such as:

  • The entrance ways
  • The car parks
  • The flow of people
  • The places where people stop and congregate
  • The larger anchor tenants type and location
  • Standards of signage
  • Lighting internally
  • Transport to and from the property
  • The tenants that seem more successful than others
  • The tenants that seem to feed customers off each other
  • The amount of time that people spend at the shopping centre
  • The busier days for customer shopping

When looking at these other properties it is wise to take selective photos of the things that may be relevant to compare to your property.  You can analyse the photos later and revisit your ideas.  Note that some property owners and managers will be sensitive to you taking photos around their property.  Discretion is the rule here.

The only way you can underpin your rental and strengthen it is through a good tenancy mix.  Given that the leases in premises are for lengthy periods of time, any mistake with tenancy mix will exist for years and frustrate the rent, the customer, the tenant, and the property.  Hence you must choose tenants well and then place them with a lease that is in harmony with surrounding premises.

As parts of that process look at these issues in balance so that any concerns of tenant mix occupancy are removed and nullified.  Understand:

  1. Income exposure at expiry
  2. Option exercise potentials
  3. Exclusive or Permitted uses in the leases
  4. Vacancy effects on other existing tenants
  5. Relationship building or conflict potential between sitting tenant types
  6. Know why tenants like or dislike your property
  7. Know how your existing tenants maximize their business operations at your property

If you follow these steps, you will be armed with the strategy you need to put you in the ‘driver’s seat’ as you implement a new leasing campaign and tenancy mix for your managed property.  You will know the tenant you want and you will have the selling points to attract them.

You can get other information on this concept here:  http://www.commercial-realestate-training.com