Due Diligence – Know What You’re Getting Into
The Latin phrase caveat emptor, or “buyer beware,” is especially true when making real estate purchases.
Many businesses assume that the infrastructure of a property they buy functions.
- Does the air conditioning work?
- Do the elevators work?
- Is the structure sound?
- Does the roof leak?
- Is the boiler safe, adequate and operational?
- Does the plumbing work?
When purchasing a building, the structure and operation of the property “should be” in good working order. If something is not working properly, negotiations need to occur prior to signing or included in a purchase contract. For example, if the air conditioning is not working, then the buyer is going to want a reduction in the price – because someone will have to repair or replace the system.
The method that a buyer uses to evaluate the condition of an asset is called, “due diligence.”
When Mohr Partners is involved in the due diligence process, a dedicated project manager coordinates with a comprehensive team of experts, including:
- Mechanical engineers;
- Electrical engineers;
- Elevator experts;
- Heating, ventilation, and air conditioning (HVAC) technicians;
- Structural engineers; and
- An inspector to check and repair the building facade, which in NYC is required to comply with Local Laws 10 and 11.
While all these professionals are inspecting different aspects of the operation and structure of the building, an architect is reviewing the building design to determine whether the space works for the buyer. At the same time, a general contractor is determining what renovations, if any, are needed and how much they will cost to repair. Performing due diligence is an inexpensive way for a buyer to understand exactly what they are getting. It is insurance for avoiding a “money pit.”
Mohr Partners collects the reports created by the relevant professionals to make certain they have a complete picture of the operation and the functionality of the building and the cost of improvements.
It’s not the building, but the functionality within space to which only the buyer can affix a final seal of approval.
Tenants also need to perform their own due diligence. Due diligence is not only for buyers but renters as well.
Case study: A tenant leased a building and after they started renovating, realized there was insufficient electrical capacity. They had to contact Con Edison to provide more electric to the space, which involved installing a new electrical switchgear and transformer. It cost the tenant hundreds of thousands of dollars – a mistake which proper due diligence would have averted.
Mohr Partners is not just in the real estate business – we are also in the business of due diligence – because being forewarned is being forearmed.
How will you know if proper due diligence has been completed before you buy or lease?
George E. Grace
Mohr Partners, Inc.
232 Madison Avenue
New York, NY 10016