The real estate business can be a wonderful and profitable pursuit. As in any other pursuit, systematic planning is rewarded while lack of planning typically proves to create systemic challenges. A key component of planning is thorough due diligence prior to committing to a transaction.
Many entrepreneurs (real estate or otherwise) have a vision of what they want to accomplish.
They understand the need for vision and to project cash flow. But equally often, they fail to understand the need for more granular diligence.
Key components for real estate due diligence include:
Expert review of key documents
- ALTA surveys
- Zoning records
- Variances easements
- Existing engineering and environmental reports. If not available, or not current, hire professionals to perform
- Any prior development or construction plans
- Any and all leases
- Service contracts and any other third-party arrangements
- Determine condition of property
- Evaluate the need for immediate capital expenditures
- Plan and budget future capital expenditures
- Review permits, partial certificates of occupancy, government codes, special assessments, and code violations.
- Review existing insurance policies and certificates and any pending claims against the property.
- Review pending litigation, if any, and determine any difficulties for the seller to convey the property.
Finance and accounting (beyond rough cash flow projections)
- Schedule of all rent and other income, common area maintenance, security deposits, and real estate tax contributions paid by tenants
- Listing of any tenant delinquencies and security deposits
- Listing of tenants’ years of occupancy, lease commencement date and lease termination date as well as any renewal terms
- If possible, review tenants’ financial capabilities.
- Review real estate tax bills, copies of all tax protests, related correspondence, and protest results for the property.
- An accounting of all income and expenses related to the property for the last three years
- A list of personal property, if any, owned by the seller and used in connection with its operation and maintenance
- Review three years of income tax returns to determine if any aggressive positions have been taken. This is important even if it is an asset deal as there are instances where liability can pass to the buyer.
If the property is a hotel
- Review existing franchise agreement and determine transferability
- Determine any required property improvement plan (PIP) that may be required
- Review existing management agreement and determine transferability
- Review Smith Travel Research Reports (STR) for market conditions and positions
Due diligence is vital to every successful deal and overlooking it could cause you significant hardships down the road. Citrin Cooperman’s Real Estate Industry Practice’s team can help with by providing all types of financial diligence and can also help you assemble the team for the other areas of diligence and be your trusted advisor during every step of your journey to a successful deal.
Our specialists are here to help.
Get in touch with a specialist in your industry today.