FGCAR UNIVERSITY “DUE DILIGENCE AND RISK MANAGEMENT” by Matthew J. Lapointe, Esq.

INTRODUCTION WHAT IS “DUE DILIGENCE” Caveat Emptor = Let the buyer beware 3 Categories of Due Diligence:  Financial  Physical  Legal

Financial Due Diligence What is the property’s current Net Operating Income ? How much income will it produce when the buyer owns it? Financial Due Diligence  Income Side  Expense Side

Financial Due Diligence INCOME SIDE  Actual financial data for past 3 years  Tax returns for past 3 years  Rent Roll (current and past if available)  Tenant Files (especially in large residential bldgs)  Review Actual Leases (expiration, escalators, market rent)

Financial Due Diligence EXPENSE SIDE  Operating Expenses  Utilities – 2 years of bills  Property taxes  Insurance Policies  Other expenses (maintenance, trash removal, etc)

Physical Due Diligence Value; Structure; Physical Features of Land  Appraisal  Environmental  Zoning Compliance  Building Structural/Engineering Order 3 rd Party Reports only AFTER Financial DD complete

Physical Due Diligence ENVIRONMENTAL  Phase I Environmental at minimum  If Issues arise on Phase I, then do a Phase II  Seller’s reports should not be relied upon by buyer  Seller’s reports do not establish proper environmental DD on behalf of Buyer

Physical Due Diligence ZONING COMPLIANCE  Research zoning regulations for the site  Confirm legality of existing use and any planned use  Density requirements, height limits, development standards  Will Buyer be able to make changes after the purchase?

Legal Due Diligence Title Insurance Commitment (ALTA Form) 1. Covered Risks 2. Exclusions from Coverage 3. Schedule A (legal descriptions) 4. Schedule B (exceptions) 5. Conditions

Legal Due Diligence Title Insurance Commitment (cont’d) Covered Risks Include:  Someone else owns the property  Defect or encumbrance on title caused by fraud or forgery  Liens (taxes, assessments, etc)  Title is unmarketable  No right of access

Legal Due Diligence Title Insurance Commitment (cont’d) Exclusions from Coverage  Governmental regulations on the land  Eminent domain  Title matters created or agreed to by insured  Title defects known to insured but not disclosed to title company

Legal Due Diligence Title Insurance Commitment (cont’d) Schedule A  Date of Issuance  Dollar amount of coverage  Name of Insured  Legal Description of the property Ensure that legal description in deed matches legal description on Schedule A.

Legal Due Diligence Title Insurance Commitment (cont’d) Schedule B  Exceptions to title (un-released mortgages, easements, tax liens, covenants, restrictions, etc.)  Items not covered by policy  Items on Schedule B must be resolved before closing or buyer accepts with these issues

Legal Due Diligence Title Insurance Commitment (cont’d) Conditions  Definitions  How claims are filed  How to prove a loss

Legal Due Diligence SURVEY  ALTA Survey  Review Survey in conjunction with legal description from Schedule A of Title Insurance Commitment  Follow Metes and Bounds description on survey plan (ensure the description “closes”)  Study the NOTES section of the survey

Conclusion Seller’s Agents can be very helpful in Due Diligence Process  Educate Sellers about what to expect  Help Sellers locate important information/documents Buyer’s Agents can educate buyers about DD Process “TRUST, BUT VERIFY!”