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Commercial property risks & Why you should use a buyers agent

21 May 2019

In any commercial property acquisition decision, it is imperative that buyers carry out adequate due diligence before committing either their own funds and/or the funds lent by a financial institution. An adequate identification of key issues and risks should be carried out by a qualified property professional. Pertinent issues include that a qualified and experienced buyer’s agent would investigate include the following;

1. Market risks

A. Owner occupier or investor;

i. Liquidity of the asset and level of interest if offered to the market in a resale

ii. Estimated selling period

iii. Likely buyer profile i.e. owner-occupier, private or institutional investor

iv. Details of any pre-sale

s or pre-lease agreements

v. Key positives and negatives that a potential purchaser would consider

B. Tenant;

i. Prospects for leasing

ii. Likely market rentals, incentives and time to lease up

iii. Key positives and negatives that a potential tenant would consider

C. Asset

i. Proposed quality and design

ii. Special features (positive and negative) such as quality of location, transport access, adjoining developments, amenity etc.

iii. Competing developments (existing and proposed)

iv. Planning and environmental issues

D. Cashflow Profile

i. Quality of proposed tenant(s), lease expiries and vacancy factors (if applicable)

ii. Income growth prospects and/or volatility compared to market

iii. Proposed rentals (if any) compared to market

iv. Proposed level of outgoings compared to market

v. Likely cash flow volatility over the ensuing 3-5 years

vi. Level of taxation liabilities such as land tax

vii. Quality of the lease covenants and lessee profiling

viii. Weighted Average Lease Expiry analysis

ix. For retail properties proposed turnover rent ratios and other revenue and expensive items

E. Development

i. Status of existing/proposed development applications and building approvals

ii. Development potential

iii. Services available and connected to property (if any)

iv. Construction timeline and anticipated date of completion

v. Confirm the experience of the developer's consultant team in similar projects

F. Asset Management

i. Identify development/project manager responsible for overall management of the asset and comment on their experience in similar projects

2. Site and environmental risks

A. Site risks include;

i. Availability and costs of connecting services

ii. Potential flooding or land slip issues

iii. Site accessibility

iv. Potential site problems such as drainage and sewer restrictions, geotechnical issues, proposed resumption/compulsory acquisition

B. Environmental risks include;

i. Contamination risks to be investigated via the appropriate Contaminated Sites Registers

ii. Conversing with tenants, adjoining owners, past owners and local authorities about prior and present uses

iii. Confirmation if the site is an environmentally sensitive area, creek of water course

iv. Adjoining residential uses and potential for local action groups protesting the current or proposed uses of the property to be acquired

3. building & Development risks

i. Ascertain whether all necessary approvals or consents are in place (e.g. planning permits, subdivision plans, approved building applications, occupancy certificates)

ii. If a development site, the DA conditions impacting the underlying site value or the feasibility of the project, including any details of public space contributions or Section 94 contributions

iii. Provide an opinion on whether the DA represents the highest and best use of the site

iv. If an existing building, a building audit to determine whether there are any current or potential defects including the costs to rectify

v. Potential costs for refurbishment or maintaining the building to meet ongoing an unforeseen compliance costs such as environmental sustainability, retrofit for energy production or consumption targets, onsite waste management

In adequately identifying the risks in a commercial property proposition, a buyer’s agent will prevent the potential new owner from making costly mistake or overpaying for the asset. A good buyer’s agent will facilitate the transfer of specialised market knowledge, provide access to privileged information, and offer his or her skill and experience at negotiations. A business owner could successfully navigate the process but might miss important market information a buyer’s agent could supply that would maximize profits as the business expands. He or she might not recognize potential negotiation items that would save them hundreds or thousands of dollars over the course of a lease or acquisition. Having an agent that represents your interests is an investment in itself.

Eddy Wong

Buyer’s Agent & Property Valuer

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