Real Estate Due Diligence – Yes We Can!

What is Due Diligence?

Christophe Daudigny Head of Project Management RealCorp Luxembourg

Investing in real estate brings great rewards… partly because there are great risks. But you can protect your investments in advance. A Due Diligence assessment (known in the industry simply as a “Due Diligence”) is the process of systematically researching and verifying the quality of a real estate asset. This includes addressing and ticking off a check-list any point with a risk (technical, financial, legal). The final result is a report or series of reports presenting the findings to the commissioning client. Christophe Daudigny summarises:

Why do you need a Due Diligence report?

Due Diligence helps prevent unnecessary problems and claims from either party involved in a transaction, or from the tenants of the Asset. It is often the most appropriate and best way for the owner to obtain a sustained global view of the asset, including quality, risks and expected costs.

The goal of the process is often to ensure that all stakeholders associated with a Real Estate transaction have the information they need to assess risk accurately. In real estate, due diligence is performed in the period between the acceptance of an offer and the closure.

What’s in a Due Diligence report?

A Due Diligence report by RealCorp usually contains the following elements:

  • Legal report: An examination of the validity and implications of any applicable authorisations, whether existing or expected, and an analysis of the statement of the asset with regard to impending laws and regulations, e.g. sustainability requirements.
  • Financial report: An assessment of the quality of the tenants and the asset’s financial efficiency, including maintenance efficiency, and the quality of existing contracts with purchasers providing maintenance elements.
  • Technical report: Based on an exhaustive visit to the asset, this is a complete report on all technical elements, such as heating, ventilation, structure, fire security, windows, insulation, roof equipments, lighting, etc.
  • Final report: This includes a refurbishment proposal with scheduling and cost estimation.
  • Sustainability report: If requested by the client, we can assess the cost and the potential Return on Investment of creating a sustainable asset from an old building.
What does a Due Diligence assessment cost?

Asset managers are required to perform Due Diligence with the standard of care that a reasonable person exercises to avoid harm to other persons or their property. When the assets are large, the amount of care required increases. RealCorp teams manage the entire due diligence process for any Real Estate asset under the supervision of the Head of Project Management. He is assisted by the Project Management technical teams and the company’s financial experts.

The cost of a complete Due Diligence, with all technical, legal and financial items, is related to the area and the number of buildings of the asset (for example, visiting two buildings of 10 000sqm takes longer, and is therefore more expensive, than visiting one!). As a guideline, a range of €30,000-50,000 is normal for an office building of 5,000-10,000sqm.

How long does a Due Diligence take?

Two or three months are normally necessary to process a complete Due Diligence including :

  • getting the basic elements from the As Built files
  • performing and processing all the visits and enquiries
  • creating a final report, in three parts: non-technical short conclusions with costs, complete report, technical appendix.

The most recent Due Diligence delivery by RealCorp was in June 2014. We performed a Due Diligence assessment for an asset of three buildings in Capellen. After 11.5 days of on-site visits and 2.5 months of work, the team produced a comprehensive report covering structural and other defects, technical data and building history, replacement of inadequate or missing documentation, costings, etc.

Due Diligence: The rewards

The benefits of avoiding or minimising risk to assets or the people inside them via Due Diligence are mostly obvious. Another benefit usually less well articulated is the capacity to make long-term cost-savings. One can sometimes even make asset-enhancing, profit-maximising decisions based on the findings.

The above-mentioned comprehensive report enabled the client to prioritise and budget for repairs over the coming years, with a clear understanding of where to focus first. The projection of likely capital expenditure and the updating and organisation of all legal and technical documentation are also valuable in gearing up for a possible future sale. A clear assessment of the state of the buildings and easy access to all related documentation increase the project’s desirability because they are very useful to a potential purchaser.

Post updated 16 June 2015

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