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1、AICPA National Real Estate ConferenceDue DiligenceStephen A.StonerNovember 17,20002 What is Due Diligence Risk management toolVaries by client Varies by practitionerConsistency beginning to develop in secondary mortgage marketsIndustry standards accepted by rating agencies,investors,and intermediari
2、esDependent on good data23 History of Due Diligence Prior to 1980sMinimalLate 80s,early 1990sRequired and criticalMid 1990s-currentChanging real estate marketsMuch done internallyLarger buyersDifferent risk mitigation proceduresFutureto be determined34 Reason for Due DiligenceFile stufferDecision to
3、olSales toolAsset managementDeal structuring45 The Due Diligence ProcessSalesContractExecutedFinancialOperationalReviewTenantReviewMarketAnalysisPhysical Asset and EnvironmentalReviewPro FormaAnalysisRecommendationto Buyer56 The Due Diligence ProcessSalesContractExecutedTenantReviewMarketAnalysisPro
4、 FormaAnalysisRecommendationto BuyerFinancialOperationalReviewPhysical Asset and EnvironmentalReview67 Financial Operational ReviewRevenue StreamsCurrent RentSigned and current leases(including amendments)Legal clausesRight of first refusalGo dark provisionsRight to cancelNoncompete clausesOtherTena
5、nt tourAccounts receivable agingOther forms of cash flowStorageInternet and telecommunication accessPhone revenue(hotels and motels)Other78 Financial Operational ReviewOperating Costs:high levelCosts per square feetBOMA and other benchmarks(building size,location and age)Analytic reviewReview of tax
6、 returnsAdjustments for unusual itemsResults used to focus detailed review89 Financial Operational ReviewOperating Costs:detailedService contractsEconomic reviewReview executed contractsCompare financial terms to operating statementsLegal reviewDurationAbility to cancel or rebidImplications of saleR
7、epairs and maintenanceReview of vouchersCapitalization versus expensesProperty taxesReview recent tax billsOtherReview of vouchers910 Financial Operational ReviewCapital itemsDeferred maintenanceWalkthrough Engineering reportCapital improvementsEngineering reportStrategic plan for property(ies)Ident
8、ifiable versus annualLease commissionsLinked to revenue streamMarket commissions-adjusted for business planTenant improvementsLinked to revenue streamPrimarily driven by physical condition of building and market requirementsEngineering report1011 Financial Operational ReviewConclusionsNormalized NOI
9、Identification and quantification of trendsUnusual items1112 The Due Diligence ProcessSalesContractExecutedTenantReviewMarketAnalysisPro FormaAnalysisRecommendationto BuyerFinancialOperationalReviewPhysical Asset and EnvironmentalReview1213 Evaluation of Tenant CreditFinancial stability(credit ratin
10、g)Industry concentrationsOther concentrations1314 The Due Diligence ProcessSalesContractExecutedTenantReviewMarketAnalysisPro FormaAnalysisRecommendationto BuyerFinancialOperationalReviewPhysical Asset and EnvironmentalReview1415 Market AnalysisThree primary componentsSite analysisSupplyDemandSupply
11、DemandSquare FeetTime1516 Market AnalysisSite AnalysisVisibilityAccessIngress/EgressAmenitiesSources of demandCompetitionQualitySurrounding land uses,current and projected1617 Market AnalysisSupplyHistorical inventoryExisting and future competitiveDisaggregated by size,quality,and ageProjected futur
12、e developmentPlanning departmentsMedia researchLocal market interviews1718 Market AnalysisDemandHistorical absorptionMarket research of key indicatorsNew business startupsPopulation growthOther economic trendsOther demographic trendsProjected growth in demand Demand(sq ft)Time1819 Market AnalysisRec
13、onciliation of supply and demandRental ratesPercentage rentsOccupancy levelsCommissionsBuildoutGrowth ratesRentalExpenseCapitalization ratesRenewal assumption1920 Market AnalysisSpace may be vacant prior to re-leasingNew rent is setNew tenant improvements,commissionsBase years,sales,other levels are
14、 setRenewal assumptions-What happens at the end of a lease?2021 The Due Diligence ProcessSalesContactExecutedTenantReviewMarketAnalysisPro FormaAnalysisRecommendationto BuyerFinancialOperationalReviewPhysical Asset and EnvironmentalReview2122 Physical Asset and Environmental ReviewEngineering report
15、Deferred maintenanceRequired capital improvementsArchitects or space plannersEfficiency of existing space:opportunities or constraints for value enhancementEnvironmentalPhase 1,2 and 3Title search2223 The Due Diligence ProcessSalesContractExecutedFinancialOperationalReviewTenantReviewMarketAnalysisR
16、ecommendationto BuyerPhysical Asset and EnvironmentalReviewPro FormaAnalysisConverting analysis to cash flow2324 PROFORMA ANALYSISAnalysis of projection assumptions based upon historical performance and market researchCompilation of projected revenues,expenses and net operating incomeAnalysis of cap
17、italization and discount rates,debt service and post-financing cash flow,if required2425 Things to look for:If a portion of the property was non-operating during the year,the effect on future operating results needs to be consideredThe sellers or buyers budget,if used in the analysis,may contain opt
18、imistic assumptionsThe fees and corporate overhead expenses charged by the seller will be modified after acquisitionAll appropriate taxing jurisdictions and respective taxes are adequately reflectedEffects of non-recurring items projected to occurPROFORMA ANALYSIS2526 Tenant by TenantAppropriately TimedIndustry AcceptedReady for“What if”AnalysesEasy to Review and ProofPROFORMA ANALYSISAdvantages to Prefab Systems 26