Get the Facts Straight
Help clients dig deeper with their due diligence before they purchase income-producing property
By Rhonda Garland, managing principal, Investment Analytics Group
Property-buyers can fall into
many due-diligence pitfalls when
purchasing income-producing commercial real estate. Perhaps the most-sig-nificant is not customizing the underwriting assumptions to the specific property
they wish to purchase.
Buyers often rely solely on underwriting assumptions when considering an
investment-property purchase. initially,
underwriting assumptions are somewhat
standard for most buyers.
in a stable market, these often include a 2-percent to 3-percent annual
Ultimately, buyers must do their due
diligence to back up their assumptions.
Because projected capital expenditures
can have the most influence on under-
managing principal of Investment
Analytics Group, has more
than 10 years’ commercial
real estate experience,
leasing, acquisitions, due
diligence and financing. Before co-founding
IAG, Garland was vice president of due
diligence for one of the largest U.S. real estate
investment companies, where she oversaw
all due-diligence functions on more than 100
properties valued at more than $1.2 billion. Visit
www.iagroupllc.com; contact Garland at (208)
846-8476 or firstname.lastname@example.org.
rent-growth rate, a 5-percent vacancy allowance, a 75-percent probability that existing tenants will renew and allowance
of a 15-cents- to 50-cents-per-square foot
Due diligence that customizes and
substantiates underwriting assumptions
is critical. in a tight credit
environment, buyers seeking financing must be able
to substantiate and support
their assumptions more
it isn’t enough to rely
only on appraisals and
property-condition assessments (PCas) to ensure feasible underwriting.
Beyond simply being
a financing source, mortgage brokers can help their
clients by knowing how to ensure that
property underwriting is customized to
the property in question. They also should
know how proper due diligence can help.
Knowledge of these issues can help ensure that a property’s actual financial performance won’t be drastically different than
the initial or preliminary underwriting.
assess the property’s condition and future
capital costs. PCa reports commonly over-project the remaining useful life of equipment or building components or fail to
project costs to correct existing conditions
adequately. This is because a visual inspection rarely reveals deficiencies in the existing conditions. additional
investigation is needed that
PCa consultants typically
do not perform.
properties may expose buyers to greater risk in projecting capital costs accurately.
For example, consider a
midrise office building that
has more-complex heating,
ventilation and air-conditioning equipment like
chillers, boilers and vari-
able-air-volume boxes for air distribution
with computerized controls compared to
a small neighborhood retail center, with
split heating and cooling systems or roof-top-packaged units for the tenants’ heating
and cooling needs.
The office building’s greater exposure would warrant investigating the
“Beyond simply being a financing
source, mortgage brokers can help their
clients by knowing how to ensure that
property underwriting is customized
to the property in question.”
writing results, buyers should investigate
the asset’s current condition thoroughly.
Lenders often require a PCa, which will
provide some basis for projecting ongoing
maintenance and repair costs, as well as
One mistake many buyers make, however, is stopping there with their efforts to
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