The secret to smart due diligence

High-stakes property transactions are complex by nature, and due diligence comes at a cost.

But if you’re acquiring a large commercial building, the cost of not doing your homework can be far greater.

That doesn’t mean you need to spend money on dozens of consultants and a mountain of reports. But how do you choose which actions deserve investment and which ones can be ignored?

The secret to smart due diligence is strategy. What is your game plan? Is your play to reposition and resell? Is it to hold the asset for the long term? Is it a knock-down rebuild or a refurbishment? Are you after one landmark building or starting to amass a portfolio of assets?

"I always start by asking my clients one clear question: What is your strategy? Are you holding the asset for 50 years or turning it over quickly? Is it a hold or a redevelopment play? This informs how we approach due diligence"

Niall McSweeney

Head of Development Advisory, Asia-Pacific

Four cases: How smart due diligence is informed by strategy

Case 1: A large commercial office is up for sale

Constructed five years ago by a reputable builder and reliable structural engineers, the building is in good shape. A large-scale physical inspection of mechanical services, façade and structure is unlikely to uncover many issues.

Instead, the due diligence team chats to the asset manager to find out the issues impacting the experience for tenants. They discover the basement is leaking and there are complaints from customers that their cars are getting damaged. A hydrology specialist is engaged to determine the problem, and a plan of action can then be pursued.

Case 2: An industrial site is ripe for redevelopment but planning approvals could take several years

Rather than outlay Capex in the short-term, the best strategy is to maintain the status quo for five years. There is potential to write off GST while walking down this path, so the due diligence team calls in an accountant to understand the tax implications.

Case 3: A residential tower is perfectly positioned and popular with tenants

But as it nears two decades in age, the tower’s potential buyer is worried about the biggest headaches of ageing buildings: the waterproofing, fire safety, façade, structures and services.

The due diligence team uncovers a full-service history and a maintenance plan for the mechanical services, which means they need only engage a structural specialist to identify any problems with the façade.

Case 4: A development company has its eyes on a D-grade office that is ideal for adaptive reuse

The building’s bones are good and the CBD location is second to none. But a quick call to the planning department determines that the site cannot be redeveloped at its current building height. With four fewer floors, the numbers won’t work.

The next step? The due diligence team talks to designers that identify a staggered solution that will ensure the new building doesn’t lose its top four floors.

Your guide to smart due diligence

In this guide we will cover:

• The four various types of due diligence (market, physical, financial and legal)

• The pertinent questions you should be asking

• Strategy: the missing step

• The best practices to navigate the due diligence process

Download your copy of the guide today

If problems or obstacles are discovered during the due diligence process that have serious economic or use-impacts on the property, it is time to walk away from the deal or renegotiate the purchase price.

A sound due diligence process should determine a walk-away price – the top price you are willing to pay when the final price negotiation is conducted.

If not managed efficiently, a deal may fall through, or you could fail to uncover issues that could lead to serious financial risk.

Don’t fall into the trap of thinking you’ll be able to fix any problem after the fact.