MV’s 31-Point Check-List of the Essential Due-Diligence you’ll need to Complete Successful Commercial Property Transactions in the Caribbean

The Indispensable Check-List of Documents and Information
that Buyers need to Request,
and Vendors should Prepare,
when Transacting Commercial Property here in the Caribbean.

When you buy a used car, you look under the hood, you kick the tyres, and generally give it a thorough going-over. If you get a bargain of a used car at a greatly discounted price, you tend to tolerate more faults and defects, than if you buy a brand-new performance vehicle at a list price from the showroom forecourt. The point is, you investigate and confirm the desirability and value of what you buy, assessing the investment risks for each individual Real Estate Investor, aligning this with their agreed Purpose of Investment and Investment Criteria, prior to Completing a Purchase, and any associated Financing. This is the Due Diligence & Investment Process in a nutshell. The only difference between Due Diligence for Commercial Real Estate Investment Transactions, and that for a used car, is what information you will need to seek out and evaluate.

Since most Commercial Property Transactions in the Caribbean are made on an “As-Is” or “Sold-As-Seen” basis, conducting a proper Investment Analysis, with supporting Due Diligence Exercise, is especially important, Advanced Knowledge for both Occupiers & Investors, as well as their Lenders and Financiers. Although there are many elements of the Due Diligence & Investment Process, including obtaining new third-party building condition and Valuation Reports, along with a legal title search and verification report, the below Due Diligence Checklist focuses on information which we recommend Buyers attempt to obtain from Vendors prior to Completing on a Transaction for a Commercial Real Estate Property.

Due Diligence is a key part of acquiring or transacting Commercial Real Estate, particularly so when transacting in the low-information and opaque Commercial Real Estate Markets of the Caribbean. For Buyers, matheson valuation has found that historically Client’s may have found the Due Diligence Process a costly and time-consuming one, and so may be reluctant or resistant to engage in one. 

However, matheson valuation have learnt, through our decades of experience in supporting commercial property transactions, that it is a necessary cost, even a requirement, that inevitably will save Client’s time, money & inconvenience, allowing for Advanced Knowledge of unidentified defects of a property’ legal title, income profile, or condition that would inevitably surface in the long-run. Our Detailed, and Process Driven, approach to Due Diligence allows us to uncover for our Client’s the underlying facts, risks and circumstances that may materially impact the true value of the property being transacted, and guide the price they are willing to pay, or be willing to accept, for the Property. It enables our Clients to reach a conclusion on whether they are getting a Great Deal, whether they should be Renegotiating Down the Offer Price, or even to make the difficult decision to Back Out of the Deal altogether.

At matheson valuation we always recommend that Vendors try to anticipate the requests Buyers will make during the Due Diligence Process and take Preparatory Steps in gathering the data, so as to expedite the sale process of their Commercial Property Investment. This will include Organising and Preparing Due Diligence documents for Buyers in advance of placing the property on the market, and where necessary preparing a Data Room to make available the relevant documentation.

Below we list out our detailed Due Diligence Check-List, although not fully comprehensive, this list of documents and data points will get the Buyer well on their way to understanding what is being hidden under the hood of their target property:

tenant information

1. Rent Roll showing, for each Tenant:

• Tenant’s name, suite number, size of premises.

• Nature of Tenant’s business and use, including exclusive use rights, if any.

• Contracted Rent/ Rent Passing, scheduled rental increases or review clauses, percentage rent or index.

• Term commencement and expiration dates, options to extend or renew the lease.

• Options and rights of refusal to expand or contract the premises or to terminate the lease.

• Common Area Maintenance (CAM) expenses, or Service Charges, with pro rata share or recovery.

• Security deposits held, along with banking statements to evidence.

• Guarantors, if any.

• Concessions made to Tenants, or rental arrears, including free or reduced rent, above standard tenant improvements, cash payments, moving allowances, or takeover of previous lease obligations.

• Nature of Tenant’s business and use, including exclusive use rights, if any.

• A schedule of any Tenant improvement work seller is obligated to complete but has not yet completed and capital improvement work either scheduled or in process on the date of the purchase agreement.

2. Current and historic annual vacancy/occupancy rates.

3. A copy of all leases (including all exhibits, and attachments) and amendments, including guarantees, assignments and subleases, along with standard form lease.

4. A copy of, or access to review, the Tenants’ files maintained by the Vendor, or their Management Company.

5. Most recent financial statements and credit information and reports, if any, for all tenants and guarantors.

6. Current and historic payment reports for each Tenant.

7. Any executed letters of intent or pre-let agreements with prospective Tenants.

8. Most recent leasing status report from leasing broker, along with details of current brokerage agreement in place.

operating information

9. Financial statements of the property for the past three years and year-to-date for the current calendar year.

10. Current operating and capital expense budgets of the property, including evidence (bank statements) of any CAM sinking fund, reserved or held for future maintenance, including comparison of actual to budgeted results and an explanation of significant variances.

11. Listing of capital expenditures for the property for the prior years.

12. Copies of all service, maintenance, leasing, management, or other contracts, and all other agreements, warranties, deposits and guaranties relating to the operation, use, management, or maintenance of the property.

13. Copies of real estate tax bills for the prior three (3) years, including evidence of payment of each.

14. Utility bills for the last two years.

15. Aged receivables report through the date for the prior twenty-four (24) months.

16. Copies of all owner’s insurance policies now in effect with respect to the property, including owner disclosure affidavits, insurance inspector’s risk assessment reports and copies of any claims under such policies, and evidence in seller’s possession that tenants are maintaining any insurance coverages required under their leases.

17. List of property employees, if applicable, including name, position, wage and benefits.

building information 

18. Floor-plans to scale, architects drawings, measured floor areas and specifications showing “as built” condition of the property.

19. Mechanical reports, including HVAC.

20. Roof condition reports.

21. Environmental reports, including soils tests, flooding, radon, mould, lead paint and asbestos reports where geography or age of building make these relevant.

22. Geotechnical soils reports.

23. Seismic or hurricane risk assessment (probable maximum loss) reports.

24. Reports showing compliance with applicable disabilities accessibility act requirements.

25. Architect’s certificate or statutory certificates or surveys certifying the completion of the building, including the square footage of the building.

miscellaneous

26. All licenses, permits, and approvals for the property, including, without limitation, certificates of occupancy for the building and for each tenant.

27. Most recent boundary and/or title survey.

28. Seller’s policy of title insurance for the property, if available.

29. Copies of any notices of violations, or verifications, of compliance with any federal, state, municipal, or other health, fire, building, zoning, safety, environmental protection, or other applicable codes, laws, rules, regulations, or ordinances relating or applying to the property.

30. List of all pending and historic litigation against the property, against Vendor, or any general partner or agent of the Vendor that relates to the property.

31. A list of all furniture, fixtures, equipment and supplies attached to, located in, or used in connection with the operation of the property which will be conveyed to the buyer.

Depending upon the information available to the seller, the Buyer’s request list may be winnowed down by the Vendor during negotiations. This process, in of itself, may provide the Buyer with Advanced Knowledge of Potential Risks, Red Flags, or Costs that will be incurred in obtaining missing information.
To Accurately Price an Offer to Purchase an Commercial Investment Property, and assess whether it meets a Client’s Required Rate of Return
and their Investment Criteria, we need to understand the level of detail and accuracy of the Data being Made Available, and gather the Advanced Knowledge & Insight into the Property’s Inherent Risks, drawn from our Effective Due Diligence Process.