Due Diligence Process

Level 1

Financial

• Current rent rolls

• Operating and capital budget

• Operating statements YTD or 12 months running (certified)

• Discrepancies between rent roll and actual occupancy

• Unit mix or certified square footage

o Respective rents

• Existing financing or liens on property

• Check of value

o Cap rate

o Cost/Unit

o Cost/Sq Foot

o Gross Rent Multiplier

o Replacement Cost

• Understand staffing costs

o All current employees

• Name

• Job title and description

• Pay rate

o Benefits

General

• Physical confirmation of property conditions through site walkthrough

• View all vacant spaces to determine what capital would be required to induce a

new tenant

• View all common areas and base building areas

• Interview management team, leasing personnel, handyman (scope of work,

employee or contract labor, rate)

• Machinery/Equipment

o Office Equipment

o Maintenance Equipment

o Tools

o Vehicles

o Other

• Supplies

Physical

• Physical confirmation of property conditions through site walk through

• Property zoning classification

• View all base building areas, all floors, central plant, roof, exterior wall

• View all areas of building exterior and interior common areas

• Walk property line, photographs

• Night Inspection

o Security and lighting

• Review all architectural and engineering documents related to property

• Street size, congestion, condition, accessibility into property

• Biggest recurring maintenance problem

• Vacant sites on property (potential to expand existing property)

Level 2

Financial

• Add: Rent rolls, Operating Statements (certified), Capital Expenditures past 3

years

o Operating Income statements for past 3 years

o Balance sheet statements for past 3 years

o Tax returns for past 3 years

o Chart of accounts

o Accounts Receivable:

• Rents (Rate, due dates, history)

• Misc. Income sources

• Home sales, leases, rent/lease option, notes, contracts

• Bank accounts, deposits, other financial assets

o Accounts payable:

• Purchase orders

• Open/credit accounts

• Petty cash

• Notes payable

o Approved vendors

o Contracts

• Copies of every lease on rent roll

o Include names, addresses, current amount, deposits, rent history, estoppel

certificates, late fees, NSF, collection)

• Schedule for rent increases

• Estoppels from no less than 75% of tenants in commercial building, including

ALL tenants expiring or renewing in next 3 years and ALL tenants leasing over

10% of the building area

• Determine if any change in property taxes (Do taxes break out cost of land?)

• Pull original land purchase price on project

• Understand all transaction costs

o Real estate commission, if any

o Legal fees pursuant to transaction

o Accounting fees relative to financial statement review and pro forma

preparation

o Possible acquisition fee if an advisor’s services are utilized

o Title-related costs (insurance)

o Mortgage costs (points and closing fees)

o Appraisal

o Inspection

o Engineering reports/survey

o Environmental study

• Recalculate:

o Cap rate

o Cost/unit

o Cost/sq ft

o 1st year cash-on-cash

o 1st year total ROI

• Investigate financing possibilities

General

• Thorough understanding of the workings of the property under current setup

o Policies/procedures Manual

o Move in & move out procedures

o Existent files for residents, vendors, etc

o Emergency notebook

o Leases (written or verbal)

o Deposits/administrative fees

o Software used including maintenance and support

o Office supplies

o Forms/letterheads

• Interview all tenants on estoppel list to confirm information provided by seller

o Ask about problem areas—Management, physical property/structure, etc

• Delinquent units

• Confirm all information received against information developed through

investigation

• Develop a trust quotient with Seller

• Name and contact info for existing Insurance agent and coverage

o Copy of existing policy

o Workmen’s comp, liability, bond, hazard

• Local commercial agent

o What do apts sell for

o What are current rents

o What would comparable structure sell for

o Sales info for other groups in same area

o Average per capita of storage square footage

• Local residential agent

• Look into local advertising

o Current yellow pages cost

o Yellow book

• What percentage of competitors are in Yellow book

o Other avenues

• Local transactional real estate attorney

• Local Industry contacts i.e. Applicable associations

• Location of local:

o Post office

o Bank

o Schools

o Stores

o Employers

o Public Transportation

• Local rent survey, average rates for standard units

o Last 2 completed by Seller

o Over last 5-10 years if possible

o Check local newspapers for ads, etc.

o Local telephone directory and Yellow book for ads

o List of local competing retailers

o Evaluation Seller’s currently used ads, signage, brochures, etc.

o Chamber of Commerce packet

o Verify occupancy, rates fees charged, security systems

o Phone call and physical visit to each competing property (See

supplemental “Market Study” form)

• Pictures if permissible

• Interview managers

• Name of off-site management company

• Need copies of permits:

o All city and county permits

o Storm water management permit

o Consumption use permit

o Water supply permits

o Pool, Jacuzzi, etc.

• Learn about local laws

o Leases

o Evictions

o Regulation

o Licenses

Regulatory Agencies

• Board of health

o Copy of license

o Property records

o Pool and Jacuzzi reports

o Violation notices, if any

• Building department

o Talk with inspector

o Planning for other similar projects

o Ease of permitting

o Name of good roofer

o Name of good inspection company

o Building costs

o Name of good appraiser

o Certificates of occupancy

o Permits in force

o Local codes

o Known violations and records thereof

• Engineering Department

o Drainage information

o Local soil maps

o Proposed area improvements and related assessments

o Impact fees

o Utilities concerns

• Sewer, water, electrical and gas

• DER-EPA (Dept of Environmental regulation and environmental protection

agency)

o Wastewater treatment plant discharge permit

o Effluent testing results

o Flow records

o Treatment plant violations

o Domestic water supply permit

o Domestic water test results,

o Domestic water violations

o Domestic water flow records.

• City Planning—talk to senior planner

o Current new building permits for projects under development

o Path of development

o Floodplain maps

o Impact fees?

o Barriers to entry

o Ease of permitting

o Zoning in 4 mile radius

o Zoning in our area

o Special zoning?

• Map

o Thoughts of over-building of ________(student housing, self storage, etc)

• Tax assessors

o How much will property taxes be after sale

o How often do they reassess

o Name of good appraiser

• Better business bureau

• Chamber of commerce

o Growth statistics

o Boom bust economy

o Typical job types

o Projected growth areas

o Path of development

• Register of Deeds (or possibly a title company)

o Property ownership

o Eases and Encumbrances

o Legal description and acreage

Utilities

• Copies of meter record for both treatment plant and water supply wells

o Sewage treatment plant and water supply records

• Approvals for water sanitary collection system

• Approvals for domestic water distribution system

• Utilities Department

o Sewer and water rates

o Tap-in fees

o Impact fees

o Sewer and water capacity requirements

• Utilities commission

o Rules, regulation and status of utility

• Drainage district

• Name and contact info for gas and electric utility company

o Types of approved units

o Who owns and maintains

• Name and Contact info for telephone company

• Trash collection

• Name and contact info Cable television

o Who owns system

o Who maintains system

o Who invoices users

o Existence of a formal agreement between property and cable company

• Can it be renegotiated

Physical

• Professional contractor inspection

• Maintenance

o Evaluation

o Deferred maintenance items

o Obsolescence (how/why)

• Night Inspection

o Security and lighting

• Street plans with utilities identified

• Roof condition

• Boundary survey including all easements and encumberances

• Retrieve air quality samples

• Drainage type and adequacy

• Sewerage handling and adequacy

• Irrigation system

• Floodplain presence

• Vegetation and maintenance

• Environmental issues

• Inspect all maintenance records and interview supervisors in charge of critical

areas

• Receive copies of all documents related to mandatory inspections ADA/TDLR

compliance, ACM inspections, etc.

• Develop 5-10 year Capital plan for property, price projects, schedule out

o 2 Bids on cost of major improvements

o Cost for installing security, alarms, video

• Research any problems with elevators, other equipment

Fire/Life safety system status

• Type of building structure, any below grade levels, soil type

• Type of building cooling and heating systems

• Vertical transportation systems

• Type, age, and condition of roof (warranty)

• General assessment of leaks and exterior wall condition

• Elevators up to ASME A17.3 standards (Texas)

Red Flags

• Seller balks at providing records or access as committed in contract

• Stained ceiling tiles around the perimeter of the building (or shrinking

gaskets/joint failure)

• Dirty mechanical and electrical closets

• Poor maintenance and inspection records

• Financial records or estoppels not available

• Significant error in process or accounting