Real Estate Due Diligence Services

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Sophisticated investors recognize the potential for attractive returns achieved by taking advantage of real estate valuations in today’s market. While thorough financial due diligence is paramount for sound decision-making, it needs to be conducted efficiently and effectively to prevent missed opportunities. We can provide specialized due diligence services when and where you need us, better equipping you to quickly respond to critical closing deadlines. Our real estate due diligence team can assemble a large number of experienced real estate professionals by drawing on the breadth and depth of the resources within the subsidiaries of Deloitte LLP.

We possess extensive experience over a broad spectrum of real estate due diligence services, both pre- and post-acquisition, and can help you screen targets, assess critical issues and opportunities, and identify deal-breakers early in the process. Our goal is to provide you with a competitive edge, helping you execute transactions that create deal value and returns while mitigating risk.

Lease advisory services

A combination of accounting, property management, and real estate skill sets are used to create a financial due diligence package of lease abstracts and rent roll reconciliations to reconcile against the base, percentage (for retail), and additional rents represented by the Seller’s Pro Forma NOI and Argus models. Detailed samplings are performed for cash deposits, aged receivables, maintenance contract terms, estoppels, and tenant encumbrances to help you evaluate the accuracy and integrity of the seller’s supporting documentation. Tenant common area maintenance, operating expense, and tax pools are also prepared for revenue valuation and ready billing to your new tenants once the transaction closes.

We perform both economic and operational lease abstracts to confirm the accuracy of the Seller’s Argus (or other) model Pro Formas to ready the lease database for eventual operational control. Our rigorous operational abstract process includes lease abstraction and two levels of reviews to help verify source data for critical rents, dates and options.

• Abstraction – we abstract data from the source lease documents into a lease abstract form, making sure to reflect lease attributes specified and approved by our client
• Inspection – we scrutinize each lease data attribute input into the lease abstract template, which helps to facilitate consistency of data and attributes captured and to assess whether the lease attribute data populated in the lease abstract template is consistent with the lease
• Review – we complete a final review of the information contained in the lease abstract template, focusing specifically on rents including operating expense, property tax and sundry income language, critical dates, and options. The effort here is to apply an additional review on the critical lease elements

Argus model analysis

The primary goal of analysis of Argus models is to compare the lease abstraction rents, dates and options against financial information found in sellers’ Argus models as well as reasonable property expenses. Key steps in this analysis include comparing base rents, operating expense and tax recovery computation methodologies contained in the lease abstracts and property expenses to the data contained in the sellers’ Argus models and test for outstanding owner obligations relative to tenant improvements and leasing commission. We can help assess the sellers’ model, focusing on Net Operating Income (NOI) and its primary constituents, revenues and expenses. Steps can include:

• Analyzing seller-prepared Argus models
• Comparing seller-prepared budget to Argus operating expense pools
• Preparing analysis of operating expense “leakage”
• Reviewing Argus model assumptions
• Revising/preparing final Argus model for closing

Financial analysis

We perform various types of reviews to help buyers better understand the revenue generation potential of the assets they are buying and identify unexpected owner obligations to tenants, including:

• General ledger review
• Income statement and/or balance sheet review
• Budget review (focusing on large capital projects, deferred maintenance and unpaid lease-up costs)
• Review of CAM/Tax pools and tenant reconciliation statements
• Tenant payment history review
• REIT income compliance – review of revenue streams for ancillary revenues
• Analyze and forecast property and debt-level cash flows
• Stress test cash flow assumptions
• Calculate debt and equity cash flow waterfalls for distributions
• Portfolio underwriting
• Perform ROI, IRR calculations, and sensitivity analysis
• Identify key financial terms in loan documents
• Market research and borrower credit analysis
• Variance analysis of historical operating expense trending

Contingency search

As part of our financial due diligence we can also help you ascertain any risks involved in an acquisition you are contemplating, which is paramount for distressed real estate opportunities. Services include:

• Lease file review – this helps you become aware of potential tenant or seller issues such as bankruptcy, lawsuits, environmental issues, service/operational complaints, and other exposures
• Legal review – we review and cross-reference legal bills on the General Ledger, lease files and seller’s internal reports (if available)
• Option encumbrance analysis – which looks for various tenant rights and obligations in their leaseholds such as renewals, early terminations, contraction rights, must takes, and more
• Proposition 13 (California only) – we assist by preparing a summary of tax limits on a tenant-by-tenant basis
• Service contracts – helping to make you aware of owner/contractor termination rights
• Estoppels – we assist clients in the preparation of estoppels for mailing and inspect the returned estoppels for contingencies, cross-referencing with Argus models and lease abstracts
• Co-tenancy exposure – (retail only) evaluating which tenants are entitled to discounted rents due to other tenant dark spaces and/or general reduced occupancy in the center

Additionally, our global Deloitte Touche Tohmatsu member firms and affiliates (DTT Member Firms) may be of assistance to you in gaining orientation to foreign geographies, meeting with local professionals, and understanding business practices. In some circumstances and geographies, DTT Member Firms may be able to assist in assessing investment opportunities, and/or joint venture partners.

Learn more about our real estate due diligence team, as well as our Real Estate Consulting, Lease Advisory and Business Valuation services. Read more about our broader offerings around distressed real estate.

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