DUE DILIGENCE – ANZ NOTE
1.0
Introduction
1.1
Purpose
The
purpose of this guidance note is to provide a guide to
Members
as to the due diligence process which a prudent
purchaser
would undertake prior to entering into acontractual
obligation to acquire a commercial property.
1.2
Status of Guidance Notes
Guidance
notes are intended to embody recognised ‘good practice’
and therefore may (although this should not be
assumed)
provide some professional support if properlyapplied.
While they are not mandatory, it is likely that
they
will serve as a comparative measure of the level
of
performance of a Member.They are an integral part
of
‘Professional Practice’.
1.3
Scope of this Guidance Note
This
guidance note applies to Members performing
due
diligence or involved in the due diligence process
in
relation to commercial property.
1.4
Comprehensive and Probing Investigation
These
guidelines are intended to provide a guide to thedue
diligence review process which a prudent purchaser
would
undertake prior to entering into a contractualobligation
to acquire commercial property.There is no
single
definition of “due diligence”, although the expression
is
now in common usage, particularly in relation to securities
law
where a specific due diligence defence is available todirectors
of companies in certain circumstances. In general
terms,
however, a due diligence exercise is taken to involve
the
type of comprehensive and probing investigation which
a
prudent adviser would bring to bear on the matter inquestion.
1.5
Numerous Issues ....a Checklist
These
guidelines also aim to alert interested parties tothe
numerous issues which ought to be examined and
addressed
in order to ensure that such parties are fullyinformed
regarding the attributes of a particular property,
and
the risks associated with a proposed transaction.Whilst
we
have aimed to make the guidelines as comprehensive
as
possible, they have been drafted so as to provide nomore
than a checklist of points and issues which ought
to
be considered in a property transaction. (A one pagechecklist
is included as Annexure 1).
1.6
Necessity of Engaging a Team of Experts
It
is not intended that these guidelines provide a do-ityourself
checklist
for property investors and other relevant
parties.
Indeed, the numerous issues set out in this document
should
alert users of the guidelines to the necessity of
engaging
a team of qualified professionals to undertake the
due
diligence review.This team may include experts such
as
valuers, land economists, structural engineers, consulting
engineers,
solicitors, architects, financial and taxation
consultants,
quantity surveyors, urban consultants, etc.
1.7
Advice on Changes to the Law
Though
efforts are made to keep guidance notes current,advice
should be obtained regarding any changes to the
law
and practice in more recent times.
2. Valuation
2.1
General
Advice
that may be obtained from a Valuer or Membercould
include following matters.
2.2
Importance of Establishing Value
Any
purchaser of property must, of necessity, form a view
as
to what the particular property is worth. Ultimately,
one’s
assessment of value will be a key factor in determining
how
much to pay for a property or an interest in property
and,
from the point of view of a vendor, how much toaccept
for the sale of a property. Equally, the value of a
property
will be of critical importance to a lender whoproposes
to advance money against the security of a
property.Valuations
may also be required for the purposes
of
financial statements, for insurance purposes, and to
assist
in analysing investment performance.
2.3
Appoint a Valuer to establish Market Value
[Definitions
- Market Value]
In
order to obtain an expert and impartial assessment ofthe
value of a property, a suitably qualified, experienced and
(where
required) registered or licensed valuer (being aMember
of the Institute) should be appointed to prepare
a
valuation of the property on an appropriate basis. Usually,
this
will involve an assessment of the property’s “Market
Value”
which is defined by the International ValuationStandards
Committee (whose definition has been
adopted
by the API and PINZ).
2.4
Forced Sale Price
On
occasions, a valuation report may include adviceconcerning
the price that might be achieved for a
property
in the circumstances of a forced sale. Similarly,an
assessment of the replacement cost of a property may
sometimes
be required.
2.5
Valuation Methodologies
There
are several valuation methodologies which may
be
used in assessing the value of a property, and different
methodologies
may often produce different outcomes. Itwill
often be appropriate for more than one methodology
to
be considered, and a valuer needs to form a view as
to
which method or methods best suit the particular
property.
Methodologies commonly used in valuing aproperty
are:
• comparable
sales - points to be considered in relation
to
both the subject property and comparables include:
– location;
– size
and type of the property;
– lease
and tenancy characteristics;
– rental
income;
– outgoings;
– age
and condition of the property and
building
services;
– potential
for rental growth / redevelopment.
• capitalisation
of income (market and / or passing rents)
-
points to be considered include:
– comparable
sales evidence;
– alternate
investments;
– rental
received / rental growth potential / market
rental
levels;
– lease
terms;
– types
of tenants / financial strength;
– type
of ownership - freehold or leasehold;
– supply
and demand;
– economic
factors / inflation rate / bond yields;
– supply
and demand.
• discounted
cash flow / target internal rate of return -
assumptions
need to be made regarding:
– required
discount or target rate;
– rental
income / future rental predictions;
– covenant
of the tenant(s);
– taxation
/ capital gains;
– outgoings;
– inflation;
– exit
capitalisation rates;
– terminal
value;
– forecast
period.
• hypothetical
development (for development sites)
-
assumptions need to be made regarding:
– best
permitted development for the site;
– time
required to obtain approvals, develop and lease;
– development
cost;
– future
rental income;
– initial
yield;
– development
profit;
– valuation
on completion of development.
• summation
method (direct comparison)
-
points to be considered include:
– land
value rate;
– building
value rate;
– comparable
sales evidence.
(Note:
Care should be taken with the use of this methodin
relation to properties with investment potential)
2.6
Contents of Valuation Report
Although
the contents of a valuation report will varydepending
on the type of property and the purpose of
the
valuation, generally speaking, a valuation will need to
address
the points listed below:
Basis
of Valuation:
• Market
Value;
• forced
sale;
• replacement
cost.
• Land
and Title
– title
reference;
– name
of the registered proprietor(s);
– identification
of encumbrances such as easements;
– covenants
etc
– identification
of registered leases.
• Location
of the Property
– description
of location;
– commentary
on access / public transportation;
– proximity
to major commercial / retail centres;
– special
features such as views, adjoining developments;
– demographics.
• Site
Description and Services
– land
dimensions and area;
– site
accessibility;
– services;
– site
problems, ie. drainage, potential flooding,
apparent
contamination, soil characteristics etc.
• Town
Planning/Resource Management
– current
zoning (including restrictions which
may
affect future potential of the property);
– extent
to which use constitutes;
a
non-conforming use;
– proposed
amendments to planning scheme;
– development
codes, site ratios, developmentguidelines;
– transferable
floor area issues.
Improvements
• description
of improvements and materials used inconstruction
including, structure, floors, service core,
walls,
roof;
• description
of internal finish including, wall finishes,ceiling
finishes, floor finishes, doors;
• description
of general accommodation including,
toilet
facilities, tea rooms etc;
• commentary
on age and condition of improvements
and
building services including, air conditioning, lifts,
fire
services, security system, backup power supplies;
• analysis
of net lettable area;
• compliance
with current building regulations.
Environmental
Issues
Tenancy
Details
• description
of all leases, licenses and agreementsincluding
commencement date, name of lessee /
licensee,
demised premises, term / options, currentrental,
rent reviews, lessee’s obligations etc;
• commentary
as to whether leases have been executed;
• comparison
of actual rentals and market rentals;
• consideration
of current and potential future vacancy
levels
including timing and costs of re-letting premises;
• consideration
of impact of future rent reviews;
• commentary
on rental arrears;
• review
of outgoings;
• commentary
on financial strength of tenants;
• detail
current incentives / financial obligation
to
tenants (ie. carpet, painting, fit out etc).
2.7
Market Overview
• general
market overview (including legal, political,economic)
• overview
of specific region in which property is located
• both
overviews would usually address factors including:
– demand
and supply;
– vacancy
factors;
– rental
movements;
– demographics
/ population growth;
– any
other trends in the market.
Valuation
Approach
• rationale
behind method or methods of valuation;
• details
of comparable sales and other market evidence;
• reconciliation
of the various valuation approaches.
Valuation
• valuation
amount and date;
• note
qualifications, assumptions and disclaimers.
3.Structure
3.1
General
Professional
advice should be obtained on any structure.
3.2
Engage Structural Engineer and others
A
Structural Engineer should be engaged to examine and
report
on the structural condition of the property. It may
be
appropriate for a structural engineer to be engaged
together
with other specialist engineering disciplines and /
or,
depending on the nature of the building, also an architect.
For
example, on a high rise building with a curtain wall
facade,
there would normally be a need for an architect
with
specialist ability in this technology to work with the
structural
engineer. Clearly, the types of report required
will
vary, depending on the size and nature of the subject
property.
3.3
Co-ordination of Reports into one
Where
a building is significant, it may be advisable for an
architect
to co-ordinate all of the reports from the various
engineers
into one “Condition Report”.This report should
not
only identify problem areas, but also provide an
indication
of the cost to rectify and when rectification
will
be required.
3.4
Due Diligence Process
The
Due Diligence process should involve:
Review
of documentation including:
• as
built architectural drawings;
• structural
drawings;
• structural
calculations;
• geotechnical
report;
• other
specialist reports such as wind engineering
facade
testing;
• shop
drawings, particularly of performance
specified
facades;
• construction
quality control reports;
• any
reports on building problems;
• warranties.
Building
Code Compliance
Advise
on whether the structure meets relevant building
code
or other legislation as well as cost to upgrade the
building
to comply (if viable).
Inspection
of Property
• inspect
together with building superintendent (or
other
person familiar with maintenance of the building);
• obtain
information regarding problem areas,
maintenance
program, any major maintenance
items
(i.e. roofing replacement) etc;
• inspection
of tenant fit outs - do fit outs comply
with
statutory requirements?;
• talk
to occupants.
Design
Criteria
• review
basic design loads for different parts
of
the building;
• examine
how design loads relate to codes and
industry
standards, including floor live loads,
wind
loads and earthquake loading.
Durability
• report
on durability problems, such as rust staining,
spalling
of the surfaces, and comment on implications
and
reparability;
• comment
on any potential durability problems having
regard
to specification of the materials, and known
general
industry practices at the time of construction.
Serviceability
• examine
performance of structures in delivering
and
maintaining a flat floor;
• consider
necessity for confirmation survey
to
respond to signs of lack of flatness.
Wear
and Tear
Itemise
all items of defect in the structure, floor
and
wall finishes, and comment on reparability.
Exterior
of Building
• review
all exterior coverings;
• report
on condition of the roof and sealants;
• report
on availability of a building maintenance
unit
(BMU);
• inspection
of facade using BMU;
• consider
water penetration from all exterior
surfaces,
both above and below ground.
Building
Interior
• report
on finishes on the interior of the building;
• note
presence of cracks in floor or wall finishes,
delamination
of cladding, poor performance of joint filling
materials,
condition of tiles in bathrooms, floors and
walls,
presence of cracks in masonry walls and the like.
Occupational
Health and Safety
Asbestos
survey
4.0
Mechanical and
Electrical
Condition
4.1
General
The
quality of building services is becoming an increasingly
important
influence in the value of a property.
4.2
Condition of Building Services
The
condition of building services is an important factor
to
be evaluated by a purchaser of property, as it will affect
the
demand for rental space and the operational costs
of
the building, with a flow-on impact on the value of
the
property. Indeed, the quality of the building services is
becoming
an increasingly important influence in the value
of
a property, as tenants begin to appreciate the benefits
of
a “smart” building in terms of productivity and flexibility.
4.3
Mechanical and Electrical Engineer
A
mechanical and electrical engineer should be engaged
to
report on the status of the systems within a building,
such
as:
• heating,
ventilating and air conditioning systems;
• electrical
systems;
• fire
protection systems;
• hydraulics;
• lifts;
• communication;
• security
systems.
4.4
Report on Compliance and
Cost
to Upgrade
The
report should include advice as to the extent of
compliance
with current regulations and cost to upgrade
to
comply if systems are currently inadequate.
4.5
Other Specialists May be Required
It
may be appropriate for other specialists, such as
architects,
quantity surveyors or building regulation
specialists,
to also be engaged to report on these systems.
4.6
Due Diligence Process
The
Due Diligence process should involve:
• Review
of documentation including:
– architectural
drawings;
– design
drawings for each discipline;
– heating,
ventilating and air conditioning;
– electrical;
– fire
protection;
– hydraulics;
– lifts;
– communications;
– security
systems;
– specifications
for each of the above disciplines;
– as
built drawings for the above disciplines;
– maintenance
manuals;
– maintenance
reports and logs;
– information
in relation to building outgoings.
• Inspection
of Property
– Inspect
property together with building superintendent
or
other party with experience with the operation
of
the systems in the building and understanding
the
maintenance trends
– Talk
to occupants
• Design
Criteria - report on issues such as:-
– air
conditioning and heat loads
(and
after hours capabilities);
– power
requirements;
– air
filtration;
– location
and maintenance of cooling towers;
– life
safety systems including sprinkler systems,
ventilation
for smoke removal, location of fire
fighting
devices;
– flexibility
to meet tenants’ requirements.
• Installation
- inspect the installation to ascertain:
– consistency
between the design and what has
been
installed;
– quality
of the installation works;
– simplicity
of servicing the systems;
– years
of operation;
– life
expectancy (if appropriate, report on
replacement
costs or costs of remedial works).
• Operation
and Maintenance
– Review
of as built drawings and maintenance
manuals
to determine how well maintenance
and
operation has been carried out
– Inspection
of maintenance records and logs to ensure
there
has been regular systematic maintenance
of
the various systems
– Inspection
of records relating to maintenance of
fire
protection items, e.g. extinguishers, hose reels,
fire
panels, evacuation systems, etc
– Summary
of maintenance contracts and standard
of
service
5. Legal
Due Diligence
5.1
General
The
legal aspect of the due diligence process calls for a
consideration
of the issues relevant to ownership of the
property
including the ownership structure, the nature
of
the title and the various matters listed (GN 3: 5.4)
that
impact on use, enjoyment and value. In the case
of
properties which are leased, the legal due diligence
process
also calls for a detailed review of the lease or
leases.
Expert legal advice should be obtained in each
case.
(Note: Legislation relating to property varies from
State
to State).
5.2
Ownership Structures
The
following ownership matters should be considered:
Apart
from ownership by an individual in his or her own
name,
there are basically four legal structures that may
be
used for property ownership, being:
• company;
• trust
(unit or discretionary);
• partnership;
• joint
venture (incorporated or unincorporated).
5.3
Joint Ownership
In
addition, where interests are being acquired jointly
by
two or more parties, consideration needs to be given
as
to whether the owners should be “joint tenants” or
“tenants
in common”.
5.4
Importance of Accountants’ and
Solicitors’
Advice
The
selection of the wrong ownership structure is likely
to
have serious implications in terms of the taxation
treatment
of the investment and costs involved in rectifying
the
situation may be prohibitive as a result of the likely
imposition
of stamp duty on the transaction. Accordingly,
it
is extremely important that advice is obtained from
accountants
or solicitors regarding the most appropriate
ownership
vehicle.
5.5
Determining Ownership Vehicle
In
determining the property ownership vehicle, regard
should
be had to the following:
• income
tax;
• capital
gains tax (Australia);
• ability
to utilise income and capital losses;
• stamp
duty (Australia);
• transferability
of shares / units;
• proposed
level of borrowings;
• administration
and management;
• liability
of the beneficial owners;
• the
number and type of beneficial owners.
5.6
Types of Title
There
are basically four types of title, each of which is
briefly
described below. When acquiring a leasehold
interest,
particular care needs to be paid to the terms
and
conditions affecting the leasehold, including the term
of
the lease, restrictions on the use of the property, rights
to
purchase etc.
Torrens
- This is the modern system of title where a
certificate
of title issues in the name of the registered
proprietor
showing all registered interests.This category
includes
units in “strata” developments.
General
/ Old System/Law Title – In Australia, this is the
common
law system which was in place before the adoption
of
the Torrens system by the various States. Pockets of it
still
remain today. A feature of this system is that “title” is
actually
a chain of documents tracing ownership backwards
from
the present owner to either the original Crown
Grant
or at least to a good “root of title” which, in most
jurisdictions,
must be at least 30 years old.
Crown
Leasehold – In Australia this interest is derived
from
a lease with the Crown which traditionally will
be
for a long term.The interest may include a right of
purchase
on the lessee - usually conditional upon the
lessee
carrying out certain improvements. Since the Wik
decision,
leasehold interests which do not give exclusive
occupancy,
are potentially vulnerable to Native Title
claims.
It should be ascertained:
• whether
a claim has been lodged with the NNTT,
and/or
determined;
• whether
it is likely a claim will be forthcoming from
potential
native title holders;
• what
the effect of the above is on the activities
currently
carried out under the lease;
Crown
Land - Vacant Crown Land is also potentially open
to
a Native Title claim in Australia and Waitangi Treaty
claim
in New Zealand. Similar inquiries to the first two
points
above should be made.
Leasehold
- This is the interest that every lessee acquires
whether
under a head lease, sub-lease, ground lease,
riverbed
lease etc.
Matters
Affecting Title and Purchase Price
The
following matters should be considered for their
effect
on Title and Purchase Price:
• occupation
/ title boundaries (site survey to
determine
horizontal and vertical encroachments);
• mortgages
and charges;
• unpaid
rates and taxes;
• restrictive
covenants;
• easements
(expressed and implied);
• state
Planning Agreements;
• caveats;
• sewers
and drains;
• rules
of body corporate (where applicable);
• leases;
• confirm
lettable floor areas (by reference to an
accepted
method of measurement eg. Property
Council
of Australia or PCNZ/PINZ);
• planning
status (including rezoning ability, future roads,
future
flight path, proximity to heritage buildings);
• heritage
status;
• unauthorised
structures;
• non-compliance
with Building Regulations;
• certificate
of Occupancy and classification;
• flood
levels;
• notices
relating to planning/building matters;
• contamination
and hazardous building materials
(refer
API and PINZ guidance notes relating to
contaminated
land);
• retail
tenancy legislation;
• notices
of resumption;
• quarantine
orders (in relation to farm land);
• filling;
• fencing
notices;
• currency
of defects rectification rights and plant
warranties;
• vegetation
protection.
5.7
Planning Controls/Resource Management
Town
Planning matters should be examined.
5.8
Value Affected by Town Planning
The
value of a property will be directly affected by the
town
planning/resource management regulations which
relate
to that property, particularly in so far as those
regulations
constrain the development potential of the
property.
Where it is intended that a property be acquired
for
the purposes of redevelopment, it is extremely important
that
detailed inquiries be made to ascertain the planning
controls
which apply to the particular property by
legislation,
lease control or some other method.
5.9
Use Regulated by Planning Controls
The
use to which a property may be put is regulated
by
the planning controls.The status of a property may
vary
as follows:
• use
as of right - permit not required;
• entitlement
to permit if premises meets
specified
requirements;
• entitlement
to permit if specified conditions satisfied;
• prohibited
use;
• non-conforming
use;
• amendment
of the planning scheme required.
Issues
Affecting Development Potential
There
are numerous planning issues which may
affect
development potential.These include:
• zoning
i.e. residential (ranging from single family
to
high density dwelling), business, industrial, rural;
• height
controls;
• floor
space ratio;
• transfer
of plot ratio;
• setback;
• overshadowing;
• loss
of views;
• traffic
generation;
• sight
lines;
• car
parking ratios;
• access
to the property (proposed road works, traffic
islands,
restricted highways etc);
• minimum
frontages / lot sizes;
• density
controls / number of employees;
• approvals
(adjoining owners, cash in lieu payments);
• heritage
/ conservation issues;
• Aboriginal
interests / claims.
5.10
Copy of Development Approval
A
copy of the original development approval should be
obtained
to ensure that the building complies.
Foreign
Investment Review Board (Australia)
The
need for certain proposed real estate acquisitions by
foreign
interests to be examined by the Foreign Investment
Review
Board should be considered.
The
Foreign Acquisitions and Takeovers Act 1975 is a federal
statute
regulating foreign investment in Australia. Under
the
terms of this Act, all proposed real estate acquisitions
by
foreign interests must be submitted to the Foreign
Investment
Review Board (“FIRB”) for examination, unless
the
acquisition falls within a specific exemption category.
The
Foreign Acquisitions and Takeovers Act defines
a
foreign interest as:
• a
natural person not ordinarily resident in Australia; and
• any
corporation, business or trust in which there is
a
holding of 15% or more by a single non-resident
person
or foreign corporation or holdings of 40%
or
more in aggregate by two or more non-resident
persons
or foreign corporations.
The
exemptions to the requirement for obtaining FIRB
approval
are set out in the Foreign Acquisitions and
Takeovers
Regulations and include:
• acquisitions
of an interest in land on which a dwelling
will
be constructed where the treasurer has certified
that
the sale of the interest to foreign persons is not
contrary
to the national interests (usually conditional
on
an undertaking from the developer that no more
than
one half of the units in any development will be
sold
to foreign interests);
• acquisitions
of industrial or commercial real estate
that
are wholly and directly incidental to the conduct
of
the business of the foreign interests;
• acquisition
of direct interest in non-residential commercial
real
estate with a value of less than $5 million;
• acquisitions
of residential real estate by intending
migrants
who have received approval to take up
permanent
residence in Australia;
• acquisitions
of interest in timeshare schemes where
the
entitlement of the foreign interest is less than four
weeks
per year.
Overseas
Investment Commission (New Zealand)
In
New Zealand the need for certain proposed real
estate
acquisitions by foreign interests to be examined by
the
Overseas Investment Commission, should be considered.
(Note:
Both the legislation and rules relating to foreign
acquisitions
are subject to change)
6. Taxation
Issues
6.1
General
Commercial
investment properties are generally acquired
for
the specific purpose of providing short or long term
income
and capital growth. Prima facie, both income and
capital
gains are subject to taxation in Australia, and this
may
significantly alter the after tax rate of return of a
particular
investment. In New Zealand there is currently no
capital
gains tax. Both the vehicle, which is used to acquire
a
property and the manner in which an acquisition is
structured
and financed may have a significant bearing on
the
tax effectiveness of the investment, and it is therefore
extremely
important that expert tax advice is sought
prior
to entering into a property transaction.
6.2
Specific Tax Issues
A
range of specific Tax Issues affecting various processes
in
dealing with property should be examined.
6.3
Acquiring Property
Tax
Issues on Acquiring Property:
• ascertain
tax depreciable value on purchase
of
plant and equipment and building;
• determine
appropriate allocation of total consideration
to
plant and equipment (depreciable items should be
listed
in the contract);
• application
of depreciation deeming provisions to
transfers
of plant and equipment between parties
not
dealing at arm’s length;
• determination
as to whether properties constitute
trading
stock;
• determination
as to whether properties constitute
revenue
or capital assets;
• deductibility
of financing costs.
6.4
Holding Property
Tax
Issues on Holding Property:
• ascertain
level of historical construction costs
for
purposes of building allowance;
• determine
appropriate building depreciation
allowance
rate;
• consider
structural improvements for purposes
of
building allowance;
• determination
of whether fixtures are depreciable
and
to whom;
• determination
of appropriate depreciation rates;
• application
of investment allowance to acquisitions
of
plant and equipment;
• deductibility
of financing costs;
• tax
deductibility of repairs and particularly initial repairs.
6.5
Selling Property
Tax
Issues on selling property:
• ascertain
assessable depreciation balancing charge
or
tax deductible write-off;
• elections
to offset assessable depreciable balancing
charge
against other plant and equipment;
• ascertain
capital gains tax liability on sale of property,
plant
and equipment;
• application
of capital gains tax deeming provisions
to
transfers of plant and equipment between parties
not
dealing at arm’s length;
• assessability
of profits on disposal of plant
and
equipment as ordinary income;
• disallowance
of investment allowance for
short
term sales;
• ascertain
basis of profit realisation for long-term
construction
contracts;
• assessability
and capital gains tax implications
of
compulsory government acquisitions.
7. Stamp
Duty (Australia)
7.1
General
In
any property acquisition in Australia, stamp duty is likely
to
represent a material cost to the purchaser and should
be
taken into account when evaluating the returns from
the
property. Stamp duty is levied on legal instruments
and,
in relation to property conveyancing, will generally
be
payable on a sliding scale based on the value of the
property.
(Note:The rate of duty may vary from State
to
State.) Stamp duty is also payable on leases (being a
percentage
of the rental payable during the term of the
lease)
and on loan securities.
7.2
Due Diligence Issues
Issues
which may need to be considered
for
due diligence include:
• determine
appropriate jurisdiction;
• identify
dutiable instruments and deemed instruments;
• consider
ex gratia, reconstruction and
other
relief entitlements;
• consider
specific exemptions from duty;
• consider
specific concessions from duty,
such
as in relation to off the plan purchases;
• determine
rates;
• ascertain
stamping requirements for all documentation,
including
financing and lease documents, with particular
emphasis
on method of stamping, period for lodgement
of
documents and period for payment of duty;
• when
acquiring shares in a company or units in a
trust
which owns property, regard must be had to the
potential
application of the land rich entity provisions
which
may effect the rate of duty payable on such
transactions.
8. Locational
Influences
8.1
Location Considerations
Locational
influences vary according to the type of
building.
It may be appropriate, particularly in significant
commercial
property transactions, to commission a
suitable
qualified consultant to report on the strengths,
weaknesses,
opportunities and threats (SWOT analysis)
in
relation to locational influences.The most important
considerations
for the major categories of non-residential
commercial
property are listed below.
8.2
Office Buildings
Location
Considerations for office buildings:
• proximity
to retail facilities;
• proximity
to public transport;
• availability
of parking, either on-site or publicly
provided
nearby;
• proximity
to leading hotels and restaurants;
• commentary
on surrounding areas including future
development
and land use, vacancy rates.
8.3
Industrial Buildings
Location
Considerations for Industrial Buildings:
• ease
of vehicular access to the site;
• proximity
to public transport;
• proximity
to customers (for minimising transport);
• proximity
to raw materials, supplies and services;
• proximity
to vocational training facilities;
• proximity
to means of freight transportation
(rail
terminals, ports, airports);
• proximity
to related industry;
• commentary
on surrounding areas including future
development
and land use, vacancy rates.
Retail
Shopping Centres
Location
Considerations for Retail Shopping Centres include:
• population
in the primary, secondary and tertiary
trade
areas;
• demography
of trade area population;
• trading
mix;
• configuration
of the centre;
• any
artificial or natural barriers (roads, rivers)
which
may affect the trade areas;
• ease
of vehicular access to the site;
• prospects
for competition (both present and future);
• marketing
and promotion.
9. Design
Influences
9.1
Design Considerations
Design
influences can affect the ability of a property
to
operate to its maximum efficiency and effectiveness.
Any
prospective purchaser should consider engaging the
services
of a suitably experienced architect to assess the
appropriateness
of the buildings which are being acquired
as
well as to assess what capital may be required to rectify
any
design shortcomings.
9.2
Office Buildings
• design
Influences for Office Buildings;
• condition
of external cladding and ease of cleaning;
• lobby
size, configuration, finishes;
• adequate
lift facilities (including goods lift);
• adequate
heating and air conditioning;
• column-free
floor space (and flexible floor space
for
tenancy layouts);
• sound
insulated windows;
• adequate
car parking;
• adequate
security system;
• adequate
toilet and shower facilities;
• adequate
facilities for the disabled;
• adequate
after hours occupation requirements
(eg.
air conditioning);
• sufficient
floor to ceiling height;
• sufficient
stand-by facilities for equipment and/or
facility
failures;
• compliance
with occupational health and safety regulations.
9.3
Industrial Buildings
Design
Influences for Industrial Buildings:
• appropriate
office to warehouse ratio;
• adequate
level of natural light in the warehouse area;
• adequate
load baring capacity of the warehouse floor;
• adequate
distance between columns in the
warehouse
allowing for use of forklift trucks;
• adequate
loading and servicing facilities;
• adequate
height between spans;
• adequate
ingress / egress;
• adequate
thickness of driveways;
• adequate
room for trucks to manoeuvre once on site;
• ability
to install gantries where needed;
• hard
stand parking and storage.
9.4
Retail Shopping Centres
Design
Influences for Retail Shopping Centres:
• established
anchor tenant;
• appropriate
tenancy mix between anchor
and
specialty shops;
• uniform
shop fronts and signage;
• width
of shopping malls;
• adequate
lighting facilities, either natural or artificial;
• appropriate
heating and air-conditioning facilities;
• appropriate
space allocation to entertainment facilities;
• appropriate
sight lines;
• ease
of access and egress from retail area to carpark;
• layout
to ensure efficient retail operation;
• location
of dead frontages;
• provision
of adequate car parking and under
cover
car parking for wet weather conditions;
• provision
for expansion.
10. Leases
10.1
General/Legal Issues
Leases
are a vital component in most commercial properties
and
any due diligence process should include a thorough
analysis
of all lease covenants effecting the subject property.
Issues
which would ordinarily be considered include:
• financial
status of tenant;
• trading
strength of tenant;
• whether
and to what extent the lease has been stamped;
• term
of the lease;
• is
there an option for renewal? If yes, has it been
exercised?;
• does
the lessee have a right of early termination?;
• is
the rent a market rent?;
• is
the rent based on turnover?;
• what
provision is there for adjustment or review?;
• can
the rent reduce on a review?;
• procedure
for rent reviews;
• outgoings
recovery, including plant maintenance
and
replacement;
• repair
obligations;
• tenant’s
obligation to contribute to a promotion fund;
• tenant’s
obligation to provide turnover information;
• redecoration
obligations;
• make
good at end of term;
• insurance
obligations - lessor/lessee;
• does
the lessor have any non-standard obligations?;
• who
owns the fit out?;
• control
in relation to use;
• restrictions
on assignment and sub-letting;
• does
lessor have the right to modify or alter
the
building?;
• does
lease deal with issues relating to base
building
comfort levels / performance criteria?;
• are
the termination and damages provisions
adequate?;
• what
are the provisions relating to damage
and
destruction?;
• are
the premises “retail” premises? If yes, does
the
lease comply with the relevant legislation?;
• are
tenancy areas properly defined in the lease?;
• arrears
position;
• licence
Agreements (eg. parking);
• what
security is held;
• personal
guarantees and indemnities;
• security
deposit;
• performance
bonds;
• bank
guarantee?;
• determine
whether the lease deals with issues of;
• contamination;
• hazardous
materials;
• ozone
depleting substances;
10.2
Tax Issues
Tax
Issues which would normally be considered include:
• assessability
/ tax deductibility of lease incentives
received
/ provided;
• assessability
/ tax deductibility of lease premiums
received
/ provided;
• assessability
/ tax deductibility of lease surrender
payments
received / provided;
• timing
of assessability / tax deductibility of lease
payments
received / paid in advance;
• tax
deductibility of lease payments;
• categorisation
of “lease” as either genuine lease or
installment
purchase for tax purposes;
• consider
disallowance of interest, depreciation and
building
allowance tax deductions for assets leased
to
public bodies and non-residents;
• application
of withholding tax for leases involving
non-residents.
11.0
Contamination –
Environmental
Audit
Consider
the desirability of having an environmental
audit
of the land and building, covering matters such as
contamination,
asbestos, air conditioning, filling, underground
tanks
etc, to be carried out by specialist environmental
companies.
12.0
General
The
process should also involve a review of the following:
• access
to building reports;
• condition
Report;
• asbestos
Report;
• contaminated
Land Report;
• plant
and Equipment Report;
• depreciation
Report;
• current
construction contracts, plans, specifications;
• list
of goods and chattels to pass with the sale;
• ongoing
review of sale contract;
• preparation
of rental arrears list;
• agreement
as to treatment of rental arrears;
• files,
books and financial statements held by owners
and
managing agents;
• access
to files;
• ownership
of files on settlement;
• site
survey;
• a
surveyor should be employed to identify the
boundaries
of the subject property, and horizontal
or
vertical encroachments and to confirm the status
of
any improvements in relation to the boundaries;
• insurance
- details and claims records;
• bill
of sale over tenant’s plant and equipment;
• talk
to tenants and other occupiers. In many cases
their
practical experience will be an important
indicator
of building problems;
• property
management;
• outgoings;
• review
building outgoings;
• sight
receipts;
• review
outgoings budget.
Consider
the managerial styles that may be used
for
a property, for example:
• owner
manager;
• joint
venture manager;
• external
manger.
The
due diligence process should include:
• interviewing
existing property manager and
building
manager;
• reviewing
maintenance and service agreements
(management
agreements, cleaning contracts, air
conditioning
contracts, lift contracts). Can they be
assigned?
Will they be terminated?;
• management
staff entitlements such as long service
leave,
superannuation, holiday pay.
