Doing your homework
Total Property - Issue 6 2018
Doing your homework and thoroughly investigating some key factors before you buy commercial property is key to ensuring you buy well, says Stuart Bent, Bayleys Property Services general manager.
Buyer due diligence (DD) is more complicated than it was a decade ago, when a buyer mainly hired a lawyer to check on core areas.
“With a new level of sophistication and understanding required to ensure a proper grasp across matters such as compliance and sustainability, those days have moved on,” says Bent.
Offshore companies recently acquiring New Zealand property have demonstrated effective due diligence, exploring all areas of risk and ensuring their new assets retain the standards of safety and “wellbeing” now expected by the customers in occupation.
“With that in mind, we anticipate a timely uplift in the adoption of various rating tools such as NABERSNZ reflecting the merits in proactive and cost-effective energy management.”
Buyers of any size mustn’t sidestep new requirements – in particular, adherence to the Health and Safety At Work Act.
“No longer can you contract out of your responsibility to create a safe working environment which emphasises the importance of identifying within the due diligence process the extent of management practice in place that identifies and manages risk for the inbound new owner.”
Encouraging progress is being made by owners who better understand their compliance and workplace safety responsibilities. This will help reduce time and money spent on these key areas within the DD process.
The following should form the starting point of a DD process:
1. Investment – ensuring the acquisition “stacks up” based on key assumptions and reasons for buying. For example, does the long-term income viability align with your long-term hold objective; or, as a developer, is there zoning flexibility for alternative uses?
2. Legal – your lawyer can easily review all occupancy documentation including leases, licences, agreements and bank guarantees. This will not only verify the information represented by the vendor (or not), but also highlight any special provisions that may be onerous or risky.
3. Technical – engaging technical experts to audit the status of vital building services such as lifts, air-conditioning and fire systems. Specialist advice on key structural issues such as roofs and general building construction will help prevent surprises. It is also important to ensure service contracts are current and with reputable companies.
4. Financial – reviewing previous years’ operating and capital expenditure budgets (and year audited statements) will show you how the property has performed in terms of net operating income and areas you may identify as opportunities to improve revenue or reduce operating expense. A proper financial discovery process will help verify current income.
5. Compliance – Building Warrant of Fitness and Health and Safety (hazard and risk audits, hazard registers and reporting examples) – a key area owners may underestimate and could potentially trip up on if an incident were to occur. Buyers need to ascertain there has been a good delivery of compliance schedules.
6. Environment and sustainability – ensuring there are no contamination issues, and enquiring whether the property has sustainable practices, e.g. regular collection and tracking of energy, water and waste data. While not all owners may wish to explore a Green Star rating, the number working towards a NABERSNZ energy-efficiency rating is increasing.
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