Buyer Beware - Minimising your property acquisition risk through Technical Due Diligence
In Australia, the guiding legal principal for all property acquisitions is the maxim of "caveat emptor" meaning, Buyer Beware. It is not the responsibility of the vendor to disclose any problems with the building, it is the buyer's responsibility to find out what potential risks of the property acquisition are.
Over the past 10-15 years the property market has been highly competitive and as a result many investors opted to overlook or skim over the due diligence process in order to acquire a property before their competition. But all businesses have a responsibility to reduce risk where possible. The due diligence process will identify to the purchaser any issues and risks of a building to assist with the investment decision. Getting the right professional advice at this stage of the process should not be underestimated and can result in a smoother process saving time, cost and minimising future risk.
There are three major areas of the due diligence process for property acquisitions:
- Legal
- Financial
- Physical
This article will focus on the physical area of due diligence, which is often called Technical Due Diligence.
Technical Due Diligence covers:
- Building Structure and Fabric - An inspection of the building structure, its facades and roofs, the wider external areas and internal areas including common and tenanted areas, with the purpose of identify risk areas and quantifying the cost implications of those items.
- Building Services - A full examination of the condition and life-cycle of vertical transportation, air-conditioning units, electrical services, hydraulics, building maintenance systems, fire services, and security. This is the area where most "hidden costs" are found during the process of technical due diligence.
- Regulatory - A review of the statutory regulations to ensure the building complies with the Building Code of Australia. Where shortfalls are present then costs for remedial works are usually included.
- Environmental - A comprehensive investigation to uncover any environmental hazards such as Asbestos, underground storage tanks, CFC's and other chemicals, hazardous or deleterious materials.
- Depreciation - Critical for the after-tax return on investment, a review of all building, plant and equipment is undertaken to produce an asset register and depreciation schedule.
- Capital Expenditure and Maintenance Forecasts (CAPEX) - These will provide cost information over a period usually between 10 - 15 years of the likely expenditure required to maintain and keep the building in a working, usable condition.
Technical Due Diligence works require the specialists expertise of a number of consultants. One key member of the team are the Chartered Building Surveyors/Consultants who are trained in and understand the property sector. These consultants work alongside a wide range of advisors and consultants including legal and financial advisors who specialise in other areas of due diligence.
The Benefits of Technical Due Diligence:
- You gain an understanding of the design and physical condition of the property.
- You establish the suitability of the property for its intended use.
- Quantifying future costs and other liabilities.
- You have a solid foundation for price negotiations and allocation of risk.
- You maximise tax depreciation and capital allowance entitlements.
More information?
Full details of Technical Due Diligence services can be found on the Washington Brown Website or if you would like to speak to Chris Barker our experienced Chartered Building Consultant call him on 1300 99 06 12 or email him.