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

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Technical Due Diligence

A Smarter Way

MRMA Members

Meeting for 2012

Robert Howells

John Mathew

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Presentation Overview

Due diligence – in Property

Our approach to Technical Due Diligence

The TDD Checklist

Risks and Opportunities

Benefits and value

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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

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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

?

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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

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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

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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)

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Why do it?

To avoid buying a lemon

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Why do it?

To avoid nasty surprises

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Why do it?

Make good investment decisions

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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)

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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

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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

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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

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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


Lightning protection

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Fire services

General condition and expected remaining life of plant, equipment,

pipework and cabling


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


Fire door compliance and testing

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Hydraulics

General condition and expected remaining life of plant, equipment

and pipework


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

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Transportation

Condition of systems components (controllers, drivers,

motors, ropes, lift cars etc)


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)

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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

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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

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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

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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?

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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

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Lease reviews

Expressed or implied repairing covenants

Requirement of technical building performance

Reinstatement / redecoration obligations for lessor and

lessee

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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

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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

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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

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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

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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

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Our Services

www.napierblakeley.com

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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

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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

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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

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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

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

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