Due Diligence Checklist:
1. Verify Address and Legal Description of Property.
2. Determine if acquisition is fee, leasehold estate or both.
a. If leasehold estate review carefully to cover assignability, mortgageability, non-disturbance for leasehold mortgage and estoppels. If the lessor has mortgaged the fee, a non-disturbance from the fee mortgage is required.
b. Determine if improvements are owned by lessee (typically in a ground lease situation); in that case a deed of improvements and waivers from lessor and/or fee mortgagee is required respecting improvements, fixtures and equipment.
3. List and copies of recorded and unrecorded operating agreements, equipment leases, construction contracts, options to purchase, subleases, license and concession agreements, franchise agreements, labor agreements, and any other agreements.
a. Review; check for assignability, for unusual provisions, and for situations in addition to default which would require an estoppel. If franchise agreement, check on any upgrade requirements for transfer.
4. Existing Financing.
a. Determine What will be paid off and what will remain.
b. Get copies of all Notes, Loan Agreements, Mortgages, UCC’s, etc
c. If debt is to be paid off:
(i) Check for repayment restrictions, advance or post notice requirements and prepayment penalties;
(ii) Review Document for other problems;
(iii) Coordinate with Lender;
(iv) Procure payoff letter and, at closing, cancelled Note, release of mortgage.
d. If not to be Paid off
(i) Determine if to be assumed or taken “subject to”;
(ii) Determine requirements of release of Seller and/or assumption by Purchaser;
(iii) Coordinate with Lender and Title Company forms and recording requirements;
(iv) Determine whether any notices required;
(v) Determine if any consents required;
(vi) Estoppel Certificate;
(vii) If Leaseholds are being acquired, see Paragraph 2 above.
5. Transfer Payment Requirements: Review statues any verify with Title Company, local counsel and recorders for fee transfers, leasehold transfers and mortgages:
a. State: Form and amounts.
b. City: Form and amounts
c. County: Form and amounts.
d. Other: Inquire of local counsel.
6. Transfer Recording Requirements: Confirm with Title Insurer, local counsel, am recorders:
a. Evidence of water bill or other utility payments required for recording.
b. Tax number required on deed.
c. Notarization format.
d. Form of deed.
7. Physical Condition.
a. Check Lender Requirements.
b. List and copies of building code, OSHA, etc. notices.
c. Inquire of ongoing work or disputes with contractors.
d. Get copies of engineering, etc reports; review for problems.
e. Inspections by engineer and/or architect.
8. Licenses, Permits and Certificates of Occupancy:
a. Verify number of units on Certificate of Occupancy with listing and walk through of the property.
b. Procure copies.
c. Confirm that what is supplied is all that is required, including:
(i) Certificate of Occupancy
d. Confirm with city that a transfer of property does not trigger a building inspection or require any new permits; if permits can or must be assigned, check as to the timing of applications therefore and what then happens.
9. Copies of Guaranties and Warranties; check for assignability; determine importance
a. Determine if Purchaser will be assigned Seller’s Insurance policies or procure its own.
b. Confirm with client that it has reviewed Seller’s insurance or procured insurance satisfactory to it.
c. Note Lender insurance requirements – get Lender copy of the policy and certificate ahead of time. Most lenders want the “New York” or “standard” form endorsements for those items. Be alert for problems respecting blanket coverage, deductibles, basic coverage and amounts.
11. Environmental Matters
a. Find out who at Purchase is covering this.
b. Include in Inquiry:
(i) Notices, permits, reports, and correspondence to and from environmental regulatory authorities, including notices of violation.
(ii) Environmental consultant reports and correspondence.
(iii) Financial estimates and reserves for environmental liabilities.
(iv) List of site historically used and currently being used for waste disposal or recycling.
12. Corporate Due Diligence
a. Certificate of Incorporation and all amendments thereto (or comparable organization documents) – Purchaser and Seller.
b. By-laws (or comparable documents) – Purchaser and Seller.
c. Is Purchaser qualified to transact business in the state of property.
d. List of officers of Purchaser and Seller; certificates of incumbency. At closing, match these names and signatures to executed documents.
e. Minutes of meetings of board of directors and shareholders meetings pertaining to the purchase and sale, and Purchaser’s financing.
g. Certificate of good standing.
13. Title Insurance Commitment and Policy.
a. Match legal to survey. If no survey, order Alta Survey.
b. Check name of insured.
c. Add easement parcels and other benefits to Schedule A.
d. Get copies of all documents identified – and of all documents identified within such documents; locate on survey; review for problems such as
(i) Zoning or PUD requirements
(ii) Building lines, easements, etc. violated by improvements.
(iii) Contingencies or requirements.
(iv) Consents required upon transfer of property.
e. Make sure taxes and tax parcel numbers are identified’ confirm current payment; confirm the tax bills cover only the subjected property; for prorations, note if the last ascertainable tax bill was on property which has since been improved.
f. Endorsements to title policies
(i) Zoning (3.0 or 3.1) – confirm use;
(ii) Extended coverage, including survey, mechanics, liens and rights of parties in possession;
(iii) Mineral and water rights;
(iv) Roads and highways limited to those shown on survey;
(v) Access – as shown on survey, abutting the public way;
(vi) Address and location; and the property shown on the survey is the property insured;
(viii) For lender:
2. Comprehensive Endorsement No. 1;
3. Future Advances, revolving credit, variable rate;
4. Doing business;
5. Any others requested by Lender.
g. Check to see if the utility letters are required; if so, check timing and begin processing.
h. Check to see if fraudulent conveyance exception is present; make inquiry of Title Company
i. Check with Title Company to see that equipment leases and operating contracts do not have to be included in ALTA – they will want a list and perhaps copies.
j. Determine the amount and nature of ongoing work at the site; ask the Title Company whether it will require mechanics’ lien waivers, sworn statements, etc, for this work
k. Confirm a gap undertaking is acceptable; get form; limit to matters caused by our client; confirm that order side will also execute a cap.
l. Determine valuation of each property: taxes; appraisals; rents; allocation in purchase and sale contract.
m. Re insurance:
(i) Direct Access;
(ii) Check title insurers’ limits and financials.
n. Match exceptions in title commitment to those in purchase and sale contract.
a. Have client (often, property manager) confirm that the property shown on survery is the subject property
(ii) To Purchaser, Lender and Title Insurer;
(iii) In form acceptable to Title Insurer for purposes of issuing extended coverage endorsement.
c. Locate all matters identified in title commitment and policy.
d. Locate all improvements, including
(iii) Driveway cuts to road.
e. Confirm that the survey shows property abuts public road at point of driveway entrance
f. Flood and wetlands certification.
g. Check for any violations or encroachments over building lines, easements.
a. Title endorsement.
b. Match actual use of property to title endorsement
c. Determine if 3.1 is required; if so, procure necessary plans, etc. and pass through Title Company.
d. Special concerns of client for development of the property.
e. Review architect’s site development plan/drawings for compliance with current zoning regulations. Opinion to client regarding steps that may be required for compliance or change in zoning.
a. State law – check.
b. Local counsel opinion.
c. Title Endorsement.
17. Estoppel Certificates.
a. Ground lessor.
d. Equipment lessors.
e. Operating agreement parties.
g. Others – check with lender
18. UCC Searches
20. State and local sales and other tax clearances. Verify tax amounts.
a. Identify: Electricity, gas, phone, sewage, power, cable, others.
c. Requirements upon transfer.
22. Proratable Items:
a. Determine what they are and how they work:
(i) Taxes: See if assessment notices are out.
(iv) Lease rentals.
(v) Insurance premiums.
(vi) Mortgage indebtedness.
(ix) Guest ledger.
b. Review loan agreements for contrary provisions or escrows.
23. Lender requirements; get lender checklist.
24. Financial information, including balance sheets, income statesments, tax returns, and other financial statements.
25. Employee lists and information regarding salaries, wages, benefits, length of employment, etc.
26. Proceed to Settlement.
Peter D. Antonoplos, Esq. is a partner in the Law Offices of Peter D. Antonoplos, PLLC. Mr. Antonoplos’ practice focuses estate planning and real estate matters. Mr. Antonoplos is admitted to practice in the District of Columbia, New York State; and State of Maryland. Mr. Antonoplos routinely lectures on real estate and probate law issues in Washington, DC and New York. Mr. Antonoplos lives in North West Washington, D.C. He is an avid chess player and motorcycle enthusiast. He may be reached at 202-803-5676 or Peter@AntonLegal.com