due diligence in real estate deals

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DUE DILIGENCE IN REAL ESTATE DEALS REAL ESTATE DUMBED DOWN SERIES Premier date: April 29, 2016 1

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Page 1: Due Diligence in Real Estate Deals

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DUE DILIGENCE IN REAL ESTATE DEALSREAL ESTATE DUMBED DOWN SERIES

Premier date: April 29, 2016

Page 2: Due Diligence in Real Estate Deals

Premier Date: April 29, 2016

REAL ESTATE DUMBED DOWN SERIES

DUE DILIGENCE IN REAL ESTATE DEALS

© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 2

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WE WOULD LIKE TO TAKE THIS OPPORTUNITY TO THANK OUR SPONSORS

© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 3

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PANELISTSBIFF RUTTENBERG ATLAS PARTNERS, LLCBLAKE SCHULMAN LEVENFELD PEARLSTEIN, LLCMICHAEL WEIS WILLIAMS, BAX & SALTZMAN, P.C.

MODERATOR MEGAN POPP,

SILA CAPITAL, LLC

Meet the Faculty

© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 4

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 5

Practical and entertaining education for business owners and executives, accredited

investors, and their legal and financial advisors. For more information, visit

www.financialpoise.comDISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD

NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 6

about this webinarIn every real estate deal, whether it involves the purchase of a single family home, a shopping mall, an industrial park, a skyscraper, or raw land, due diligence is key. The type of diligence (that is, what the potential buyer actually focuses on) will vary somewhat depending on what type of real estate is being purchased and what the buyer’s intended use for the real estate it. A building inspection, in the case of vacant land or land that has a building that will be knocked down, for example, will not require a building inspection. On the other hand, certain issues need to be looked into in any deal- making sure clean title can be conveyed, for example. If the goal is to rent the property, diligence into current renters, their leases, and rental market conditions will be important. This Financial Poise webinar lays out the basics about due diligence in real estate transactions.

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If you are going to enter into (or represent someone in) a commercial real estate transaction you need to understand the legal and business aspects of the deal and you need to understand the local market. This Financial Poise webinar series provides attendees with a solid overview of the issues one needs to consider when doing real estate deals.

As with all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes, and listeners will enhance their knowledge of this area whether they attend one, some, or all of the programs.

© 2016 DailyDAC, LLC d/b/a/ Financial Poise™

About this Series

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™

Episodes in this Series

EPISODE #1 Representing the Commercial Landlord

1/19/2016

EPISODE #2 Representing the Commercial Tenant

2/26/2016

EPISODE #3 Basics of Real Estate Syndication

3/18/2016

EPISODE #4 Due Diligence in Real Estate Deals

4/29/2016

EPISODE #5 Real Estate Valuation Basics 101

5/27/2016

Dates above are premier dates All webinars also available On Demand through West LegalEd Center and

Vimeo

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 9

Due DiligenceIn real estate, due diligence means taking caution, performing calculations, reviewing documents, walking the property, etc.

Essentially, it is doing your homework for the property before you actually make the purchase

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 10

Pre-Acquisition Due DiligencePre-Acquisition Due Diligence is completed prior to entering into a contract with the seller. This includes the following items:• Review Broker Package• Check for accuracy and errors• Identify assumptions used in the forecast

• Review Property Operating Statements• Verify the property’s expenses• Review CAM income• Check for Miscellaneous Income

Link: http://www.slideshare.net/madisoncres/financial-due-diligence-real-estate-market

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 11

Pre-Acquisition Due Diligence (Continued)

• Review the Rent Roll• Verify the Tenants currently occupy the leased space• Confirm existing Base Rent and future rent bumps

• Tenant Leases• Review lease term• Review rent increases• Check for options to renew• Look for early termination options• Identify landlord expenses and tenant reimbursement

method

Link: http://www.slideshare.net/madisoncres/financial-due-diligence-real-estate-market

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• Create a financial analysis• The financial analysis provided by the seller/broker

typically presents a best case scenario.• The lease-up assumptions may unrealistic and the

expenses may be altered to result in a larger NOI meaning a higher purchase price.

• Always conduct a financial analysis separate from what was provided to apply realistic leasing assumptions and verified expenses to find an accurate NOI.

Pre-Acquisition Due Diligence (Continued)

Link: http://www.slideshare.net/madisoncres/financial-due-diligence-real-estate-market

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 13

Contract Due Diligence Period

After signing a contract for the purchase of a commercial building, the due diligence period begins, which is usually a 45- to 60-day period used to inspect every possible issue, use or aspect of the property. There are a number of key areas items to review:• Zoning Requirements• Title Commitment• The ALTA Survey

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 14

Contract Due Diligence Period (Continued)• All service contracts in place• Any previously conducted Property Condition Reports • Scheduling an up-to-date Property Condition Report to

detect major issues including:• Condition and life expectancy of the roof system • Condition of structural components of the building (walls

and floor)• Sprinkler system, HVAC, plumbing, electrical are working

and to code• Review Phase I and II Environmental Assessments

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 15

Title Commitment Review• The title commitment is the initial document issued

by the title company that sets out the company’s conclusions as to the status of the title.

• The commitment also states the terms on which the insurer will issue the final policy.

• It will reveal to the purchaser if there are title issues that need to be corrected before purchase and if there are title issues that the purchaser may want to get additional title insurance to cover.

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 16

Environmental Due DiligenceEnvironmental issues can limit potential uses of real estate, reduce its value, and be costly. It is important to know whether environmental issues exist on a property and that those issues are properly evaluated as part of the overall due diligence process. • Phase I ESA determines a likelihood of site contamination.• Phase II Environmental Site Assessment is an "intrusive"

investigation which collects original samples of soil, groundwater or building materials to analyze for quantitative values of various contaminants. This investigation is normally undertaken when a determines a likelihood of site contamination.

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 17

Purchase Contract Provisions

Due diligence is an essential provision in the purchase contract. The terms should be carefully drafted to protect each party’s interest. The following are issues that often arise from conflicting seller and buyer interests to address in this contract provision:• Documents• The due diligence provision should require the seller

to deliver property information to the buyer within a certain number of days from contract execution.

Link: http://www.lerchearly.com/publications/891-do-due-diligence-important-provisions-purchase-contracts

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 18

Purchase Contract Provisions (Continued)• Commencement• The due diligence period should not commence until

the seller has delivered all records. The seller may try to get the due diligence period to begin once a letter of intent is signed rather than the contract. Letters of intent usually are nonbinding.

• Rights• The buyer should ensure that the due diligence

provision allows both the buyer and hired consultants to enter the property and conduct studies at reasonable times.

Link: http://www.lerchearly.com/publications/891-do-due-diligence-important-provisions-purchase-contracts

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 19

Purchase Contract Provisions (Continued)• Termination• The purpose of the due diligence period is to allow the buyer to

terminate the contract if the buyer does not wish to make the purchase post-analysis. This provision should state that the buyer can terminate for any reason by sending a termination notice before the date and time specified as the end of due diligence.

• Costs• The buyer expends significant funds during due diligence. If the

seller defaults and the buyer’s only options are either to terminate or to sue for specific performance, the buyer will not be able to recover its costs. The default provision in the contract should provide that if the seller defaults, the buyer receives reimbursement for these due diligence costs

Link: http://www.lerchearly.com/publications/891-do-due-diligence-important-provisions-purchase-contracts

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 20

Due Diligence and Purchase PricePurchase price is typically determined by a property’s CAP rate. This is the net operating income (NOI) of a the property divided by its purchase price. Example 1 Example 2 Example 3

Income $125,000 $400,000 $700,000Expense $25,000 $150,000 $360,000NOI $100,000 $250,000 $340,000CAP Rate 10% 10% 10%Purchase Price

$1,000,000 $2,500,000 $3,400,000

Link: http://www.realdiligence.com/Resources/Handbook/DueDiligenceHandbookSinglePages.pdf

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 21

Due Diligence and Purchase Price (Continued)

Any variation in base rental revenue or operating expenses will change the NOI and accordingly influence the purchase price.

Due diligence is vital in determining accurate property revenue and expenses to then calculate a realistic purchase price.

Link: http://www.realdiligence.com/Resources/Handbook/DueDiligenceHandbookSinglePages.pdf

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 22

Due Diligence: The Seller’s ObligationsThere is no universal standard that determines what the seller has to provide the buyer for acquisition due diligence. This is determined by the terms of the Contract that was signed between the buyer and seller. Typically, there are two types of contracts:• The seller is obligated to provide the prospective

buyer with any reasonably requested documents • The buyer adds a checklist to the Contract that

lists all the documents and information the seller must provide

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 23

Assessing RiskDue diligence aides buyer in assessing the potential risk of a property. The buyer will have to take into account the following risks to accurately make projections about the performance of the property in the years to come: • The Market Condition• The Overall Occupancy in the Market• Inflation Trends• Management Efficiencies

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 24

Assessing Risk (Continued)

• Competition in the Area• Competition Rental Rates• Upcoming Lease Expirations• Objections from Potential Tenants• Major Maintenance Items in Need of Repair in 3-

5 years

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More About The Faculty

© 2016 DailyDAC, LLC d/b/a/ Financial Poise™

MEGAN POPPSila Capital is a real estate investment company dedicated to acquiring, redeveloping, and stabilizing distressed or failed commercial properties. Megan Popp is the Business Analyst at Sila. Her role includes researching properties for potential acquisition and taking them through the due diligence process.

Sila currently owns and manages multiple real estate projects in Buffalo Grove, IL, Indianapolis, IN, and Carmel, IN as well as land for development in Plainfield, IN.

With more than 15 years of real estate industry experience, Sila’s experience includes all of the various disciplines that are central to successful investment in real estate: acquisitions, transaction structuring, capital markets, asset and portfolio management, redevelopment and dispositions.

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[email protected]

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 26

More About The Faculty: D

BIFF [email protected]

Roger “Biff” Ruttenberg has 41 years of retail development, redevelopment, management, and leasing experience. His real estate background, including mortgage banking and construction experience, has contributed to Mr. Ruttenberg’s years of successful business projects and relationships.

Atlas Partners is a real estate services firm focusing on consulting to asset-based lenders, institutions and other users of commercial space. It specializes in workouts, turnarounds, dispositions, and maximizing the value of difficult properties.

Prior to co-founding Atlas Partners, Mr. Ruttenberg was Senior Vice President and head of the retail group at Frain Camins & Swartchild•ONCOR International. There he oversaw a leasing and management portfolio of approximately two million square feet and as well as the group’s leasing activities representing numerous national retailers.

Prior to joining FC&S in 1991, Mr. Ruttenberg founded Lakewest Equity, Inc. in 1978, a Chicago-based shopping center development firm. The firm was responsible for over 2.2 million square feet of retail development projects, 195,000 square feet of industrial space, and 74,000 square feet of office space with a total value in excess of $115 million. In 1990, Lakewest Equity, Inc. ceased active development.

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 27

D

BLAKE [email protected]

Blake Schulman is a partner in Levenfeld Pearlstein’s Real Estate Group, where he represents institutional investors and developers in acquisitions and dispositions, financings, joint ventures, leasing, construction, and commercial real estate development. Blake has extensive experience representing clients across a broad range of asset classes, including mixed-use developments, office properties, manufactured housing communities, industrial buildings, shopping centers, hotels, timeshares, and residential buildings such as apartments, condominiums and student housing.

Among his most prominent matters, Blake represented a real estate fund in the spin-out and roll-up of more than 20 companies holding nearly two million square feet of rentable office space, leading to the initial public offering of the common stock of a REIT on the NYSE. He has also handled more than $750 million of commercial mortgage financing and more than $750 million of real estate acquisitions and dispositions throughout the U.S., including dozens of REO property dispositions for multiple financial institutions.

Earlier in his career, Blake represented his clients in corporate matters related to mergers and acquisitions, private equity financings, and securities. Following law school, he served as a law clerk to the Hon. Steven M. Gold in the U.S. District Court for the Eastern District of New York.Blake has been a member of the Chicago Jewish United Fund Real Estate Division committee since 2010. He is also active in youth sports as a coach in AYSO soccer and for the Deerfield Youth Baseball Association.

More About The Faculty:

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 28

D

MICHAEL [email protected]

Michael Weis an attorney with Williams, Bax & Saltzman, P.C. Mr. Weis focuses his practice on general corporate representation, commercial real estate and finance and taxation for mid-size privately and publicly held entities.

He has represented clients in a myriad of industries including manufacturing, distribution, real estate, health care, food and beverage, technology and professional services. Mr. Weis has been involved in the negotiation, structure, documentation and closing of hundreds of complex corporate, commercial real estate and finance transactions in the United States and abroad. Mr. Weis was named a Leading Lawyer in the practice areas of Commercial Real Estate and Corporate Law.

Mr. Weis is a graduate of the University of Illinois Urbana-Champaign College of Commerce and Business Administration (B.S. in Accountancy with High Honors) and is a cum laude graduate of the University Of Illinois Urbana-Champaign College Of Law. He has been a Certified Public Accountant since 1985. He is a member of the Chicago Bar Association and Illinois CPA Society, actively serving as a member of conference task forces in the corporate, tax and real estate arenas for several years. He volunteers his time extensively to the American Heart Association.

He chairs the Firm's Business and Transactional practice.

More About The Faculty:

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EisnerAmper. Let's Get Down to Business®

EisnerAmper LLP is a leading full-service advisory and accounting firm, and is among the largest in the United States. We provide audit, accounting, and tax services, as well as corporate finance, internal audit and risk management, litigation services, consulting, private business services, employee

benefit plan audits, forensic accounting, and other professional advisory services to a broad range of clients across many industries. We work with high net worth individuals, family offices, closely held businesses, start-ups, middle market and Fortune 500 companies. EisnerAmper is PCAOB-registered and provides services to more than 200 public companies and to thousands of entities spanning the hedge, private equity, brokerage and insurance

space in the financial services marketplace. As companies grow we help them reach their goals every step of the way. With offices in New York (NY), New Jersey (NJ), Pennsylvania (PA), California (CA), and the Cayman Islands, and as an independent member of Allinial

Global, EisnerAmper serves clients worldwide.

© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 29

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www.financialpoisewebinars.com

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 34

About Financial Poise™ DailyDAC, LLC, d/b/a Financial Poise™ provides continuing education to business owners and executives, investors, and their respective trusted

advisors. Its websites, webinars, and books provide Plain English, sometimes entertaining, explanations about legal, financial, and other

subjects of interest to these audiences.

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 35

The ChamberWise™ Education Consortium is a resource for Chambers of Commerce to provide its members with valuable

member benefits by offering relevant business education webinars; and generate revenue for the Chamber as well.

www.chamberwise.org

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© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 36

Important Notes

• THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY.

• IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.

• YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.