It's no secret that due diligence is seen by some in the commercial real estate industry as a necessary evil – you can't do without it, but the process has potential to uncover unpleasant surprises at a property. For example, the environmental site assessment might identify a potential environmental concern, or worse documented contamination at a site you believed to be clean, or a property condition assessment may uncover the need for a major capital expense that was previously unidentified.
Finding issues is never fun, but not all of them will necessarily create a road block to the completion of your deal. The way you and your consultant approach the issues you encounter can have a big impact on the success of your deal. A targeted due diligence process will help identify issues early, determine how much it might cost to cure, and whether any alternatives to remediation or containment are available. It's a critical piece in assessing whether a deal can and should go through.
But can due diligence actually increase certainty of closure in a deal? Yes! It's all in the approach. There are many proactive and reasonable ways to address red flags that will put you two steps ahead. Here's an example:
Pre-disposition Due Diligence
There's value for sellers to find out and disclose as much information about an asset to potential buyers up front. Not only will this help prevent missed deals due to issues discovered at the 11th hour, it will also arm the seller against demands to reduce the sale price to cover the cost of issues uncovered during the buyer's due diligence process.
Seller's disposition due diligence provides the opportunity to address potentially deal-killing issue prior to bringing the asset to market. Alternatively, it can pay to disclose the issue early on to all interested buyers, who will be more likely to consider the issue in a competitive context. This approach worked very well for a seller of a high profile asset in LA recently: despite more than $2m of early-term repair needs for existing HVAC issues, the property received multiple bids from buyers eager to absorb these costs as calculated risk in order to get the property on their books.
The Value of Being Proactive
As mentioned, the way you and your consultant approach any red flags identified can play a big role in the successful closure of a deal. There are many things you can do to facilitate the process. Before you even take the deal to a broker, found out as much as you can about the property and seek out any existing reports. If you suspect or know of an issue, share this information upfront and put your consultant in touch with someone who can answer questions about the site's condition, history and operations. The better prepared your consultant is, the more efficiently he or she can focus on finding a solution and get you to the next stage quicker.
The upcoming webinar that I'm hosting with my colleague Jenny Redlin on May 27 at 2pm EDT will give some great tips and insights into the best approaches for getting ahead of these issues, and show you how to make the due diligence process work for you! Register here.
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