Glossary Due Diligence:

MatthiasKirchner | Expert on real estate appraisal | Real estate valuer

 

Due diligence

Due Diligence means a thorough evaluation and analysis of a property in the course of a real estate transaction (purchase or sale).

The due diligence analysis of real estate requires a systematic analysis of potentials and weaknesses, a valuation of risks as well as a substantiated appraisal.

For instance, the focus lies on the balance sheet analysis, the analysis of personal and material capabilities, the position in the market, legal, financial risks and risks due to the location, environmental impacts…

Emphasis is put on the following analyses:

1. Economic analysis: Study of the regional market, the tenants’ situation, the political situation (national and regional) with focus on development potential, demonstration of the economic situation with cyclical state, consideration of the infrastructure including the macro location/micro location as well as urban planning aspects.

2. Financial analysis: Appraisal of the profitability, both at present and in the past, survey of the quit rate and creditworthiness of the tenants, warrantors as well as a forecast on the future development.

3. Legal analysis: Analysis of the contract situation by considering possible risks. The property rights and administrative acts are analysed concerning insecurities and controversies (if necessary, a lawyer will be charged with this part).

4. Fiscal analysis: The following aspects will be considered here: the speculation tax due to the sales profit, the problematic field of commercial real estate business as well as the German transfer taxes.

5. Analysis of the building: in this field, I work together with an architect/construction engineer, whose evaluation will be added to my appraisal. The focus lies on the architectural quality, special features of building law as warranties, approvals and formal acceptances.

6. Facility management analysis: Survey of the facility management e.g. if there is room for improvement. Main points of this analysis are: the proper management, the maintenance, the facility management as well as the cost development within the life cycle of the property. The result is the so-called service level and the profitability of the property.

7. Organisational analysis (eventually): may be required in the case of investment companies.

8. Environmental analysis (eventually): takes place when site is suspected to be contaminated.

9. Analysis of fair market value: The fair market value can be found out by “the discounted cash-flow method”. A plausibility check is made by means of another income approach to valuation.

10. Enclosures: Photo documentation, land register extract, relevant layout plans, list of literature, calculations of the usable floor.

The team of “DIA- real estate experts” offers due diligence analyses even for substantial portfolios (portfolio evaluation). The experts are systematically looking for so-called “deal breakers” which means facts that could argue against a purchase. Risks, found out by the experts, could either lead to a break of contract negotiations or could be a basis for price reductions as well as warranties.

Normally, a pre-contract with the real estate expert is made. A reasonable period of time for the due diligence analysis is fixed. Further on, an agreement is made which guarantees the access to the required data. A fee, should the case arise that the property is not purchased, will also be fixed. Helpful may be a so-called „milestone report“, which summarizes the state of the property in a few words.