With real estate transactions, the first approximation of the value of a property usually takes place by determining the current net rent for the property. It is common market practice to multiply the net rent with a factor appropriate for the individual asset category (residential properties, shopping centres, office properties, special use properties, etc.). The multiplier reflects the expected average annual property management expenses and return expectations of investors for the individual asset category. With special use properties, for instance, return expectations are considerably higher than for residential properties in good locations. This valuation approach, however, ignores the specific opportunities and risks of the individual property.
For example, the following important questions remain unanswered:
- How sustainable is net rental income?
- Which factors favour an increase of rental income over time, and which factors may lead to a decrease of net rental income?
- Are there any factors, e.g. maintenance backlogs, which lead to higher maintenance expenses than usually expected?
- Are there any legal risks involving the current rental agreements (formal defects on conclusion, conflicts with existing laws)?
- Are there any technical risks, e.g. relating to fire protection?
The issues mentioned above relate to only some of the risks and potential opportunities that might influence the value of a property and should be taken into account in transactions. It is just as important for both the seller and the acquirer to determine an appropriate purchase price before negotiations start to avoid jeopardising the transaction as the process proceeds. These questions also help assess the future cash flow, and so are also relevant for evaluating the borrower’s ability to cover debt service. Finally, they influence financing possibilities and terms offered by the banks and thus represent an important aspect in obtaining financing.
Real Estate Due Diligence
The assessment of risks and opportunities usually takes place within an analysis process, called due diligence. Depending on the focus of the analysis, one differentiates between financial DD, legal DD, tax DD, market DD and technical DD. Other related types of analysis address issues including environmental risks, such as potential contaminated sites and operating risks.
As the findings from the different areas of due diligence ultimately have an impact on the value of the property, on warranties provided in the sales contract and other purchase price clauses, the cooperation between the individual due diligence teams and their coordination are of particular importance.
With our well-founded expertise across the disciplines we support our clients not only during the preparation and implementation phase, but also help them realise their real estate transactions successfully. Our auditors, tax consultants and lawyers provide comprehensive solutions for auditing, accounting, tax and business-related issues. The main focus of our activities in the field of real estate transactions is financial and tax due diligence.
- Analysis of the company’s net assets, financial position and results of operations (financial due diligence)
- Analysis of the target situation (tax due diligence)
- Investment and company valuation
- Real estate and real estate portfolio valuation
- Support for preparing relevant documents: letter of intent, confidentiality agreements and memoranda of understanding
- Structuring of the data room and support for compiling and preparing data and documents relevant for the transaction
- Coordination of the data room phase
- Audits of adjustment estimates and closing accounts for determining the purchase price
- Support for purchase pricing (after signing) and for asserting contractual claims and guarantees
- Support for the client’s own compliance with contractual obligations and timeliness
- Supporting contractual negotiations up to signing
- Drafting purchase and transfer contracts, company articles and other agreements relevant for the transaction
- Transaction optimisation in terms of general and tax law