More care ahead of that offer
On-site hazards, asbestos identification, legal agreement risks, soundness issues . . .
The need for careful due diligence when buying commercial property has never been higher in this country. Bayleys Property Services general manager Stuart Bent, says more onerous building legislation means prospective commercial and industrial purchasers are seeking advice from specialist real estate agencies, rather than just their solicitor.
When introduced in 2016, the Health and Safety At Work Act ushered in myriad additional complexities and responsibilities, Bent points out. “No longer can commercial property owners contract out of their responsibility to create a safe working environment for the tenant and their employees.
“The due diligence process now required concentrates on identifying the extent of management practices in place, plus risks for the inbound new owner. Every property owner — either as landlord or owner/occupier — must demonstrate a reasonably practicable approach to identifying, controlling, or eliminating any on-site risk or hazard . . . in particular work being undertaken at height.
“As part of the heightened HSWA requirements surrounding workplace safety, every owner with a property built before 2000 needs to show they’ve undertaken proper asbestos identification. If it is found, an asbestos management plan will need to be prepared — highlighting what level of asbestos has been identified, its location and, most importantly, how any risk is being managed.”
Bent sees more commercial property buyers are initiating comprehensive due diligence property reports ahead of putting in an offer to buy land and buildings.
“A number of elements need attention in the due diligence phase to mitigate risk or cost to the buyer which can be expensive to repair or remediate later,” he says.
“That due diligence process is far more complicated than it was a decade ago, when a buyer stereotypically hired a lawyer to check on core areas, such as leases, legal titles, bank guarantees and general conveyancing to make sure there was nothing onerous in the documentation.
“If the solicitor is experienced, he or she might give some guidance on engineering value-add opportunities before the purchase. However, with a new level of understanding required to ensure a proper grasp across compliance and sustainability, those days have moved on.
“Now, the engagement of professional property management companies greatly reduces risk in a far more complex area of property ownership.”
Core aspects
Bent says an entry-level building and property due diligence check-list should encompass six core aspects:
● Investment returns: Ensuring the acquisition ‘stacks up’ from a revenue return perspective, and that the potential purchase was underpinned by the buyer’s key rationale for buying the asset. “For example, does the long-term income viability align with your long-term hold objective as purely a landlord, or, looking through a developer’s lens, is there zoning flexibility for alternative uses that unlock future capital value.”
● Legal: Lawyers can easily review all occupancy documentation including leases, licences, agreements and bank guarantees. This will not only verify, or query, the information represented by the vendor, but also highlight any special provisions that may be onerous or risky to the potential purchaser. Professional legal due diligence should cover all conveyancing requirements including a review of the certificates of title and any council-related issues relating to the history of the property.
● Technical: Engaging technical experts to audit the status of all essential building services such as lifts, airconditioning and fire systems. Specialist advice on key structural issues such as roofs and general building construction will help ensure there are no surprises or that at least you can factor in any future capital expenditure. It is also important to ensure all key maintenance and service contracts are current, and with reputable companies. This includes fire systems, lifts, air-conditioning, electrical, plumbing, cleaning, maintenance and security systems which all require regular management set out within the terms of each service agreement. Ensuring these are in place avoids the risk that a contractor suddenly pulls out on the day of purchase or shortly afterwards because they are only a monthly contract or do not hold sufficient insurances unchecked by the owner.
● Financial: Reviewing previous years’ operating and capital expenditure budgets and audited statements will give the due diligence assessor clarity of how the property has performed in terms of net operating income, and areas the potential purchaser or their property manager may identify as opportunities to improve revenue or reduce operating expense. In addition, a proper financial discovery process will help verify current income.
● Compliance: Building warrant of fitness and health and safety (hazard and risk audits, hazard registers and reporting examples). These are key areas owners may underestimate but which could potentially trip up on
if an incident were to occur. Buyers need to ascertain there has been a good delivery of compliance schedules every year.
● Environmental and sustainability responsibility: Not only are building owners becoming more aware of their responsibilities around environmental compliance, but more are now understanding of the benefits from more energyefficient and heathier buildings.
“More tenants are starting to ask questions around sustainability initiatives within a commercial building that has direct impact on the wellness of staff and overall productivity,” says Bent.
“There may come a time in the near future where the rating of a building for energy, water and waste consumption will become mandatory. Working with tenants to improve overall building performance will eventually become common practice in New Zealand, even legislated. The adoption of even the basic sustainable practices will help to retain existing tenants and attract future occupiers.”