TDD (Technical and Legal Due Diligence) Flashcards
Describe what TDD is and its role briefly.
TDD = technical due diligence. it’s a process that identifies both physical and legal aspects of a prop inv oppo being evaluated, both of which affect performance. TDD process is to inform purchaser/investor of the condition and features of prop to ensure it meets investor requirements, and removes the unknown/take the guesswork out of the purchase process, limit unexpected costs and thus its impact on R”
* TDD is used to inform investors if prop is good or bad inv, got any unrealised potential (repurpose the prop like commercial to residential, change of legal title like strata titling an office building, extending/renovating a shopping centre)? physical aspects (design, current condition, maintenance applied to date, need for ongoing maintenance, need for capex)
* legal issues = developer of commercial re should consider as part of the due diligence process.
Name the benefits of the TDD process.
* protect prop inv, ensure building longevity and high utilisation
* provide in on condition and design so investor knows what kind of prop s/he is buying
* safeguarding Rs on the prop inv
* limiting cost of ownership
* encouraging ESD (ecologically sustainable development) practice
* provide level of protection against litigation for institutional prop investors
* establishing a safe working environment
What is the purpose of TDD?
institutional investors have
- fiduciary responsibility to the beneficial owners of the prop;
- also institutional investors need to investigate suitability of the prop inv (if the prop being purchased will suit investor needs and requirements)
Discuss fiduciary responsibility owed by institutional investors.
prop(s) may be held in the form of listed or unlisted re trusts, re coys or re syndicates, managers of these vehicles have a fiduciary responsibility to the ultimate prop owners. so penalties are imposed on vehicle managers who make false or misleading statements or omissions (annual states, qrtrly reports etc.) BUT had they undertaken reasonable investigation to back the statements w.r.t. re inv then they get to use the **‘due diligence defence’ as a defence against liability.**
Discuss how institutional investors should investigate suitability of re inv.
**caveat emptor** must be in force . investors must take all necessary steps to discover as much as possible about the purchase to determine if it suits their needs and if it sit appropriately within their existing inv pf.
Whose assistance should be enlisted in the TDD process (name types of consultants involved in TDD)?
acoustic engineers, architects, building surveyors/BCA (building codes of australia) consultants, certifiers, civil engineers, electrical engineers, fire engineering consultants, geotechnical engineers, environmental engineers, hydraulic engineers, interior designers/facility planners, mechanical engineers, quantity surveyors (they are the accountants in the building industry, some even specialise in preparing tax depreciation schemes), land economists, structural engineers, surveyors, traffic engineers, transportation engineers, town planners/economic and property development consultants (these guys carry out development feasibility analysis and demand studies) , and finally Valuers (who are prop specialists who have a detailed knowledge of all aspects of the property mkt within their area of specialisation)
Discuss how environmental assessment is carried out in general?
there is stage 1 review and stage 2 review. the idea is to have a qualified environment consultant assess the property and identify if there are any environmental risks associated with the prop e.g. presence of hazardous materials like asbestos
* stage 1 is a desktop review of the prop (review historical aerial photographs of the site, review of historical title docs, review of historical council’s development approvals, site inspections)
* stage 2 review is carried out if stage1 review identifies any potential environmental risk (stage 2 will involve detailed investigation like collection of soil, groundwater for lab testing and analysis)
Discuss mandatory requirement vs green star rating system.
- *mandatory requirement** - governed by CBD (commerical building disclosure), sell/lease office space with NLA > 2,000 sqm? then have to provide uptodate BEEC (building energy efficiency certificate) to prospective purchasers/lessees at sale/lease.
- *green star** on the other hand is voluntary environemntal rating system that evaluates design and construction of buildings e.g. best you can get is a 6 star green star certified rating which signifies world leadership in environmentally sustainable design and/or construction
What factors determine which aspects/components of the prop are to be investigated as part of the TDD process?
location, prop type, investment strategy (acquisition and management), purpose for acquiring the asset ultimately determine what asepcts/components of the prop are to be investigated as part of the TDD process . also components of the TDD report can be primary or secondary
What are the primary elements that should be investigated for every prop irrespective of type, location or investment strategy?
- structure - structurally sound? loadbearing capacity?
- fabric - often non-loadbearing and aesthetic in nature e.g. external walls , roof coverings, ceilings etc.
- external elements - pavements, kerbing, open-air and undercover parking (these are all of particular interest to large retail and industrial props because conditions of pavements and roads directly contribute to the level of capex /deferred maintenance costs
- services - (installed within a building are vital to the performance of prop. capital replacement of major plant and equipments can impose considerable costs on the owner. In retail, air conditioning, electrical services esp. lighting are major consideration followed closely by fire services - retailers need to know their clients are safe and comfortable i.e. can shop without fear or discomfort ) ; in a very aggressive letting mkt the performance of the building services could be the determining factor in gaining new LT tenants for the prop
- Capex forecasts - TDD report must provide a summary of capital replacement items over the time frame of the report to adequately inform the investor
- Deferred maintenance forecasts - it’s essentially about having a planned preventive maintenance program in place to assist in prolonging the effective life and hence earning potential of plant and equipment . TDD report should provide a list of deferred maintenance items on a time frame to mirror the capex forecast (items to be repaired or maintained rather than replaced)
List the services that are commonly installed within a commercial prop building.
- mechanical services - air conditioning and ventilation
- electrical services - control and dist of electricity within building, lighting, emergency/fire safety lightin - illuminated exit signs and emergency lighting, NCC requirement to maintain and test these on a reg. basis
- fire services - main issues being maintenance and testing and compliance with the NCC (upgade to current NCC requirements can add significant costs if refurbishing older buildings)
- hydraulic services - all water carrying services within the building e.g. rainwater collection, water saving devices, hot and cold water reticulation, water/stormwater drainage; where older buildings are concerned, main issues would be capacity, the internal condition of pipework and condition of hot water heaters
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vertical transportation - (lifts, escalators, dumbwaiters, conveyors…) **carry capacity** of any lift installaton is a main consideration and must match the expected demand based on the specific building’s size, use and quality. must consider the issues below:
* maintenance and refurbishment history
* capacity, waiting times, call-out history and breakdowns
* availability of spare parts (esp. for lift control gear) - communications - telephone main lines, dist within the prop, TV cabling and high speed access to the internet i.e. broadband. Main issues are the capacity of the system and availability of high speed internet access. (of increasing importance to commercial props, and note that with increasing comp between carriers, accommodating multiple service providers within the same building provides additional benefits to tenants. )
- building security - (we are talking control of access to the lifts and other common areas; electronic security system like CCTV, motion detectors, proximity readers…; contracts with external security coys etc. ) TDD report will have to comment on the general condition of security system (type, adequacy, age, coverage, recommendation for improvement)
Give some examples of secondary elements (discretionary and building specific elements ) of a prop to investigate.
- environmental risk and hazardous materials (2 types of environmental risks: site contamination risk, and operational risk)
- building regulations
- town planning - planning decisions can either increase or decrease prop val, which is why prop owners shouldn’t stay passive w.r.t. planning decisions e.g. rezoning process
- floor space ratio (FSR) it’s used by town planners to control the density of building within a locality. it is the ratio of permissble floor space (building area) to the are of the site. eg. FSR of 4:1 can be developed with twice the amount of floor space as a site with an FSR of 2:1 meaning double the lettable area hence more valuable if leased out .
- efficiency ratio - measures how much of the building is leasable (=NLA/GFA)
- car parking ratio
- heritage
- tax depreciation schedules (forecasts building depreciation that can be claimed against income earned)
- disabled access
- operating expenditure - TDD report should cover a review of the schedule of operating cost levels and forecasts, benchmarked against industry standards.
- lease covenants
- lease surveys
- identification survey (undertaken by a registered surveyor to ensure prop is on the land being sold with no encroachment)
- asset register - undertaken by valuer - detailed recording of all the lessor-owned assets incl. contributed tenancy fitouts, which can be substantial for props like hospitals and educational facilities
- replacement cost assessment (undertaken by a quantity surveyor) - detailed report of **current-day** replacement cost of the site improvements incl. cost to demolish and rebuild for insurance purposes. must include current-day figure coz say if legislation changes (NCC changes) since prop was designed, it could sig increase cost of construction and you end up with insufficient funds flowing from ins coy.
How does an investor typically determine which TDD report is to be chosen?
firstly, TDD report concerns the risk profile associated with purchase of the prop being evaluated, so the greater risk identified, the greater the level of details need to be in the TDD report and the greater the cost of that TDD report.
secondly, the risk profile of the investor/purchaser and the purpose of prop acquisition (reason for purchase) ultimately determine which type of TDD report is suitable.
Discuss the 5 diff types of TDD reports.
**a detailed TDD report** - purchase of a single multi-mil dollar prop has a high risk profile esp. if that prop is a sig part of the new owner’s pf ; small, purpose built or specialist props such as a medical center which has a high risk profile
* **a detailed TDD report that investigates specific aspects of the prop e.g. structural frame** - props let to state or fed govt tenants may require TDD reports that target ESD compliance issues as these tenants usually can only occupy buildings witha min green star rating
* **a short form TDD report -** purchase of an inv pf that has been managed to a high level over years
* **an overview report but with targeted detailed investigation of specific aspects that are of concern e.g. capacity and condition of vertical transport installation**
* **an overview TDD report** - where val of the prop is a fraction of the overall value of the development coy we are taking over; purchase small inv prop or a pf of small inv props like child care centers and retirement villages -> no significant risk profile so an overview report suffices in mitigating risks of purchase
but if purchase is prudent, ::**s/he always reserves the right to undertake more detailed investigations should any concern arise from preliminary inspections**::
cost implications of defects/anomalies identified in the TDD report is in fact the most important component of the report as, depending on how large it is (as a % of the purchase price of the prop), it can significantly impact the purchase decision/outcome. Why for some props, it’s only 1-25%, while it may be 40-50% for some commercial buildings ?
commercial buildings often have the most defects and thus highest costs of repair coz services can amount to 40-50% of the total cost of construction - think bout air conditioning plant and equipment, higher FSR and increase in heat-generating equipments obviously demand considerably on air conditioning so cost of replacement would be significant
On the other hand, industrial buildings defects are generally at the lower end of the scale. comes down to degree of maintenance throughout its life too. usually fabric (esp. defects in wall and roof claddings ) and safety issues therewithin contribute to the highest costs
