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Technical Due Diligence - A smarter way - MRMA - Napier & Blakeley


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Technical Due Diligence - A smarter way - MRMA - Napier & Blakeley, 3rd July 2012

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Technical Due Diligence - A smarter way - MRMA - Napier & Blakeley

  1. 1. Technical Due Diligence A Smarter Way MRMA Members Meeting for 2012 Robert Howells John Mathew 1
  2. 2. Presentation Overview Due diligence – in Property Our approach to Technical Due Diligence The TDD Checklist Risks and Opportunities Benefits and value 2
  3. 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 3
  4. 4. What is Due Diligence?Gather intelligence to assess the risks andopportunities associated with the transaction so as toinform future strategy Risks ? Opportunities Future Strategy 4
  5. 5. Forms of Due DiligenceTechnical Building, engineering, regulations Sustainability Environmental risk, hazardous materialsLegal Titles, contracts, leases, complianceFinance Financial analysis, tax, valuationsManagement Management records, lease management, arrears 5
  6. 6. Ownership CycleAcquisition Technical Due Diligence Identify issues and opportunitiesManagement Stage Strategic Asset Management Maintain condition and results Manage riskDivestment Stage Vendor Due Diligence Reduce purchaser uncertainty Expedite the sale 6
  7. 7. The Process Assessment of Deeper Exclusive Assessment of Initialproperty options investigations due property options investigations / diligence short listingDesktop Study Desktop Study Walk Though Study Walk Through Study DetailedStudy Detailed Study (1 Day) (1 Day) (2-3 Days) (2-3 Days) (2-3 Weeks) (2-3 Weeks) 7
  8. 8. Why do it?To avoid buying a lemon 8
  9. 9. Why do it?To avoid nasty surprises 9
  10. 10. Why do it?Make good investment decisions 10
  11. 11. The TDD TeamThe 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 11
  12. 12. Technical Due Diligence ChecklistPRIMARY / ESSENTIAL SECONDARY / ELECTIVE Structure  Environment Fabric  Hazardous Materials A/C Ventilation – Mech services  Sustainability Electrical  Building regulations  Health and Safety Fire  Town planning Hydraulics  OPEX reviews Transportation - Lifts  Lease covenants CAPEX forecast  Dilapidations Deferred maintenance  Lease surveys - area Insurance Report  Site Identification surveys 12
  13. 13. Due Diligence checklistBuilding 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) 13
  14. 14. Due Diligence ChecklistExternal 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 14
  15. 15. Due Diligence checklistBuilding 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 15
  16. 16. Due Diligence ChecklistMechanical 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 16
  17. 17. Due Diligence ChecklistElectrical 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 17
  18. 18. Due Diligence ChecklistFire 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 18
  19. 19. Due Diligence ChecklistHydraulics 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 19
  20. 20. Due Diligence ChecklistTransportation 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) 20
  21. 21. Due Diligence ChecklistBuilding 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 21
  22. 22. Due Diligence ChecklistEnvironment 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 22
  23. 23. Due Diligence ChecklistTown 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 23
  24. 24. Due Diligence ChecklistLand & 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? 24
  25. 25. Due Diligence ChecklistInsurance risk Current replacement cost of property OH&S issues, incident logs Public liability – review risks, cover and currency Machinery breakdown insurance Plate glass insurance 25
  26. 26. Due Diligence ChecklistLease reviews Expressed or implied repairing covenants Requirement of technical building performance Reinstatement / redecoration obligations for lessor and lessee 26
  27. 27. Due Diligence ChecklistFinancial 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 27
  28. 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 28
  29. 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 29
  30. 30. Opportunity Identification Demand Supply Supply - demand gap analysis Analysis Analysis Alignment of CAPEX with lease expiry Upgrades vs like-for-like replacement Reduced OPEX costs Gap Analysis Cash inflow from negotiated dilapidations Repositioning – improved Green Rating Good asset management Options Redundancy avoidance Analysis Tenant retention Improved rental and capital returns Strategy 30
  31. 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 31
  32. 32. Our 32
  33. 33. Case Study:edit Master title style Click to Deferred Maintenance Existing CBD Office Building 2007 2011  Detailed assessment identified  Desk study envisaged chiller deferred maintenance and replacement in medium term CAPEX over the short, medium  Lack of maintenance = reduced & long terms (up to 10 years) service life  Chiller forecast for replacement  Chiller dramatically failed, in long term - A$800K required temporary support and replacement – A$1.2M 33
  34. 34. Case Study – Development Risk New Commercial CBD Building 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 34
  35. 35. Case Study – Green RepositioningThe following is the summary of a portfolio analysed toidentify the cost of improving Green ratings Associated Existing NEW NABERS Gross Cost Capex 1- 5 Net capital Net Cost per Cost per Area Grade NABERS NABERS Increase Capital Costs per m2 years Costs m2 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 35
  36. 36. Case Study – Green Repositioning 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 36