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Technical Due Diligence - A smarter way - MRMA - Napier & Blakeley, 3rd July 2012
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1
Technical Due Diligence
A Smarter Way
MRMA Members
Meeting for 2012
Robert Howells
John Mathew
2
Presentation Overview
Due diligence – in Property
Our approach to Technical Due Diligence
The TDD Checklist
Risks and Opportunities
Benefits and value
3
What is
Due Diligence?
Literally defined as “the study that ought to be taken”
and involves the process of thoroughly investigating
and substantiating all information and issues with
the aim of becoming comprehensively informed and
better placed to judge commercial risk
Source: PCA – Guide to Due Diligence 2003
4
What is Due Diligence?
Gather intelligence to assess the risks and
opportunities associated with the transaction so as to
inform future strategy
Risks Opportunities
Future Strategy
?
5
Forms of Due Diligence
Technical
Building, engineering, regulations
Sustainability
Environmental risk, hazardous materials
Legal
Titles, contracts, leases, compliance
Finance
Financial analysis, tax, valuations
Management
Management records, lease management, arrears
6
Ownership Cycle
Acquisition
Technical Due Diligence
Identify issues and opportunities
Management Stage
Strategic Asset Management
Maintain condition and results
Manage risk
Divestment Stage
Vendor Due Diligence
Reduce purchaser uncertainty
Expedite the sale
7
The Process
Assessment of property options
Desktop Study
(1 Day)
Deeper investigations
Walk Though Study (2-3 Days)
Exclusive due
diligence
Detailed Study
(2-3 Weeks)
Assessment of
property options
Initial
investigations /
short listing
Desktop Study
(1 Day)
Walk Through Study
(2-3 Days)
Detailed Study
(2-3 Weeks)
8
Why do it?
To avoid buying a lemon
9
Why do it?
To avoid nasty surprises
10
Why do it?
Make good investment decisions
11
The TDD Team
The Consultancy Team
Lead Consultant
Chartered Building Surveyor – MRICS
Structural Engineer / Architect / Façade Engineer
Building Services Engineers
Quantity Surveyors
Regulatory Compliance Surveyors
Environmental Engineers
Land Surveyors
Town Planners
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PRIMARY / ESSENTIAL
Structure
Fabric
A/C Ventilation – Mech services
Electrical
Fire
Hydraulics
Transportation - Lifts
CAPEX forecast
Deferred maintenance
Insurance Report
SECONDARY / ELECTIVE
Environment
Hazardous Materials
Sustainability
Building regulations
Health and Safety
Town planning
OPEX reviews
Lease covenants
Dilapidations
Lease surveys - area
Site Identification surveys
Technical Due Diligence Checklist
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Due Diligence checklist
Building structure
Condition of structural frame
Adequacy of design loads
Obtain structural engineer’s certificates
Identify failures, cracking, corrosion, settlement
Review tenant installations (racking, compactuses,
safes, etc)
14
Due Diligence Checklist
External elements
Condition of pavements, drainage, signage,
outbuildings, fencing,
Landscaping
Design adequacy of pavements, drainage, external
connections
Traffic patterns, ingress and egress, carpark efficiency,
pedestrian
interface, service vehicles
15
Due Diligence checklist
Building fabric
Condition of fabric and finishes
Adequacy of design
Identify damage, wear & tear, failure, corrosion
Condition of sealants, waterproofing, dissimilar metals
Understand economic and social life cycle of fabric and
finishes
16
Due Diligence Checklist
Mechanical services
Age and general condition of plant and equipment
Review life expectancy of elements
Review design, capacity and suitability (e.g; outside air, cooling/heating
capacity)
Usage of CFC’s
Review control systems
Adherence to design standards
Review maintenance contract, service records, log-books
Conduct testing (pressure testing, oil analysis)
Review commissioning test results
Kitchen exhaust and ductwork cleaning
17
Due Diligence Checklist
Electrical services Review condition and expected remaining life
Review design, capacity and suitability
Assess capacity for future development and loading
Review lighting systems and lux levels
Compliance of emergency lighting
Review design standards
Review maintenance records
Essential services reports/compliance
Thermoscan reports, load profile reports
Testing – tong test, power analysis
Benchmark power consumption
Maintenance contracts
Review commissioning test results
Lightning protection
18
Due Diligence Checklist
Fire services
General condition and expected remaining life of plant, equipment,
pipework and cabling
Review design, capacity and suitability
Adherence to current design and building code standards
Audit performance of maintenance, service records, false alarm
history, compliance with statutory standards
Testing – flow and pressure tests, fire hose reel and hydrant
coverage, pumps, smoke tests, full function tests
Review commissioning test results
Fire door compliance and testing
19
Due Diligence Checklist
Hydraulics
General condition and expected remaining life of plant, equipment
and pipework
Review design, capacity and suitability
Capacity of roof drainage systems
Future capacity of incoming mains
Future capacity of drainage
Adherence to current design standards or building codes
Performance and adequacy of maintenance and review records
Backflow prevention to water supply
Water storage tank reports
20
Due Diligence Checklist
Transportation
Condition of systems components (controllers, drivers,
motors, ropes, lift cars etc)
Review design, capacity and suitability
Audit waiting intervals and lift speed
Adherence to current lift code standards
Performance of maintenance contractor
Audit maintenance contract, call outs, complaints,
entrapments
Risk (OHS) report of system safety (lift pits, motor drives,
passenger warning systems, guarding etc)
21
Due Diligence Checklist
Building regulations
Obtain approval and occupancy certificates
Any outstanding orders or variance to current use
Variance to current regs (usage and construction class)
Fire rating, compartmentation, access and egress
Disabled access and facilities
Fire warning, detection and supression systems
Tenancy fitouts – have they been certified
Height of racking/shelving
Performance based fire engineering solutions
22
Due Diligence Checklist
Environment and hazardous materials Review records, geotechnical reports, aerial photography, historic titles
Conduct site bore testing
Review above or underground storage tanks
Hazardous materials (asbestos, PCB’s, SMF, CFC’s, lead)
Review hazardous material registers
Acoustic engineering – transmitted noise levels from external noise and
plant
Cooling towers and water treatment – maintenance and cleaning
Waste removal (trade waste, liquids and solids)
Indoor air quality
OH&S legislation (differs to each country / location)
Dangerous goods and hazardous substances
23
Due Diligence Checklist
Town planning
Search for development approvals and outstanding
conditions
Approved use of site
Current planning schemes – affect use of site or adjoining
properties
Potential for the site
Heritage listing – conservation requirements
Check car parking approvals
24
Due Diligence Checklist
Land & lease surveys
Title identification survey – locate encroachments,
easements, licenses
Confirm ownership and land tenure details
Registration of title
Lease surveys to confirm stated lettable areas
Are services within easements?
Flooding – site subject to flooding?
25
Due Diligence Checklist
Insurance risk
Current replacement cost of property
OH&S issues, incident logs
Public liability – review risks, cover and currency
Machinery breakdown insurance
Plate glass insurance
26
Due Diligence Checklist
Lease reviews
Expressed or implied repairing covenants
Requirement of technical building performance
Reinstatement / redecoration obligations for lessor and
lessee
27
Due Diligence Checklist
Financial appraisals
CAPEX – 10 year forecast of capital expenditure
requirements
R&M – 10 year forecast of deferred maintenance and
condition based maintenance
OPEX – review supplied budgets/statements, benchmark
results
Risk rate all issues – likelihood and consequence
28
Risk Identification
Existing Buildings
Defects
Lack of planned maintenance
Deferred maintenance
End of useful life
Technical obsolescence
Insufficient capacity of building services
Sustainability and Green ratings
Contamination and hazardous
materials
Non-compliance with Building Regulations
and codes
29
Risk Identification
New Buildings
Development risk
Project partners
Procurement methodology
Conditions of development
consent
Lease performance obligations
Green ratings
Defects rectification
Transfer of warranties
Operational readiness
30
Opportunity Identification
Supply - demand gap analysis
Alignment of CAPEX with lease expiry
Upgrades vs like-for-like replacement
Reduced OPEX costs
Cash inflow from negotiated dilapidations
Repositioning – improved Green Rating
Good asset management
Redundancy avoidance
Tenant retention
Improved rental and capital returns
Demand
Analysis
Supply
Analysis
Gap Analysis
Options
Analysis
Strategy
31
Benefits and Value
Make better investment decisions based on better
information
Useful tool for negotiation
Third party endorsement
Responsible entity risk compliance
Strategise risk and harness opportunities
Retain tenants
Achieve higher returns
32
Our Services
www.napierblakeley.com
33
Click to edit Master title style
Detailed assessment identified
deferred maintenance and
CAPEX over the short, medium
& long terms (up to 10 years)
Chiller forecast for replacement
in long term - A$800K
Desk study envisaged chiller
replacement in medium term
Lack of maintenance = reduced
service life
Chiller dramatically failed,
required temporary support and
replacement – A$1.2M
2007 2011
Case Study: Deferred Maintenance
Existing CBD Office Building
34
Marketed as Green rated
Safe passive investment envisaged
Detailed study found distressed vendor
Large gaps in the D&C delivery risking lease performance obligations
& Green accreditation
Number of uncompleted works and defects – A$2.2M (2.5% of RCE)
Findings of report used to negotiate purchase price
Money for completing defects held in escrow – until completion
Case Study – Development Risk
New Commercial CBD Building
35
Case Study – Green Repositioning
The following is the summary of a portfolio analysed to
identify the cost of improving Green ratings
Area Grade
Existing
NABERS
NEW
NABERS
NABERS
Increase Capital Costs
Gross Cost
per m2
Associated
Capex 1- 5
years
Net capital
Costs
Net Cost per
m2
Cost per
m2/star
1 21,200 A 3.0 4.5 1.5 3,325,000 157 675,000 2,650,000 125 83
2 17,200 A 1.5 4.0 2.5 1,025,000 60 125,000 900,000 52 21
3 14600 A 3.0 4.5 1.5 1,825,000 125 1,270,000 555,000 38 25
4 5,100 B 1.0 4.0 3.0 1,962,000 385 330,000 1,632,000 320 107
5 8,400 B 2.5 5.0 2.5 2,608,651 311 875,000 1,733,651 206 83
6 4,700 B 2.0 4.5 2.5 1,400,000 298 730,000 670,000 143 57
7 6,800 B 3.0 4.5 1.5 1,600,000 235 1,600,000 0 0 0
8 9100 B 2.5 4.0 1.5 1,602,000 176 550,000 1,052,000 116 77
9 8600 B 4.5 5.0 0.5 865,000 101 1,000,000 -135,000 -16 -31
10 18400 A 1.5 4.0 2.5 5,400,000 293 1,600,000 3,800,000 207 83
11,410 2.5 4.4 2.0 2,161,265 214 875,500 1,285,765 119 50
36
Significant market for refurbishments and sustainable retrofits
Aged A/B Grade building stock vs demand for Green rated
buildings
Potential funding
GBF
Low Carbon Australia
Environmental Upgrade Agreements
IPD Green Property Index (2011)
Lower vacancy rates
Lower cap rates
Higher income
Higher total return
Case Study – Green Repositioning