Great way to start off the week! We just completed the due diligence process on a 113-unit apartment community our team has under contract in sunny Jacksonville, FL! Below is a basic Due Diligence checklist we use.
You’ll find a wide range of DD lists out there – some that are very basic and some more extensive that contain a vast list of items you may or may not want to request from a prospective seller of an apartment complex. You don’t want to ask for so many items that you drive them nuts and send them to the psych ward. We like to use a well-balanced list of items that get to the meat of what we need, and if there are holes to fill in during the DD period we ask then.
You will find two of our lists here. The first are items you should always request copies of (and in most cases
expect to get). The second contains items you should ask for, but may not always get from
the seller or broker — either because they don’t have copies and/or they simply don’t exist.
Note that many of the items listed will be included in the Purchase/Sale Agreement and are mandatory.
For example, a request for a copy of evidence of title (owner’s title insurance policy) and a property survey
are standard inclusions on most commercial contracts. Ask your attorney to review your Contracts
and become familiar with all obligations of the seller and the buyer for multifamily transactions.
And note this:
You can include some of these items in an addendum that is incorporated into the Purchase/Sale Agreement, making it a seller obligation/requirement to deliver to you within the time frame outlined in the Addendum. This can become a part of your inspection contingency meaning the contract is contingent upon your approval of both the physical inspection of the property and your approval of the documents.
Below is a list of due diligence items you should always request (and expected from the Seller and Broker):
- A completed and signed Seller’s Property Disclosure.
- Copies of all leases and rental applications, to include:
- Most recent financial statements and credit information and reports, if any, on any tenant and of any guarantors of any leases or rents.
- Any executed letters of intent with prospective tenants, including lease concessions.
- Leasing status report from the leasing broker, including pending rental applications.
- Include copies of leases for all subsidized tenants and documents relating to any inspections by government agencies.
- Historical rent delinquency reports.
- Operating statements (income and expenses) for the previous two years of ownership and current year-to-date operating statements.
- Certified rent roll showing unit numbers, tenant names, rent rates, security deposit amounts, current rent payment status and lease expiration dates.
- A schedule of all capital improvements made to the property for the past 2-4 years.
- Security deposit detail (tenants and pets).
- All service contracts, manufacturer and service warranties and other written contracts or agreements. A property may have contracted services for: Laundry, pest control, trash hauling, landscaping, snow removal, elevator servicing, cleaning services, window washing, security services, parking lot sweeping, etc. If possible obtain copies of current service contracts and review the following:
- Term of contract.
- Monthly cost for services.
- Work to be performed.
- Termination penalty.
- As-built surveys showing any improvements to the property.
- Copies of liens or liabilities on the property that should be known to the buyer prior to closing.
- Copies of all insurance policies.
- Copies of all insurance claims in the past 5 years.
- Lead based paint disclosure.
- Inventory of all property owned by the seller and a complete list of all inventory to be transferred with the property.
- Physical inspection of the property (this is not a document — it’s just a reminder that you should always request a physical inspection as part of your due diligence).
Here are additional due diligence documents that may (but not always required by Seller) be included in your document requests:
- Names and contact information for all employees including salary information.
- Copies of all warranties.
- Copies of last two years’ tax bills — including evidence of payment.
- Copies of all architectural renderings and blueprints.
- Environmental audits and reports.
- Soils test reports.
- Engineering studies including reports on walls, roofs, foundation, supports and floors.
- Any structural, mechanical, electrical, plumbing, seismographic, HVAC or other property systems replacement, maintenance and/or repairs (including invoices and estimates).
- Copy of current mortgage, and letter from current lender(s) showing the current balances and terms of the mortgages.
- Copies of all local utility invoices showing current service.
- Current operating and capital budgets of the Property, including comparison of actual to budgeted results and an explanation of significant variances.
- Current aged receivables and payables reports.
- Reports showing compliance with ADA requirements (Americans with Disabilities Act).
- Building square footage certification.
- Recent photographs of the property.
- Copies of rental unit floor plans.
- All property licenses and permits.
- Certification of fire inspections and any other city sanctioned property inspections.
Certificates of occupancy for each tenant.
Hope you enjoyed reading this and hope this helps you ask the right questions the next time you’re doing due diligence on a property or a sponsorship team.
Sean C. Na