The main reason due diligence is conducted in every commercial real estate transaction is to ensure that all provided facts about the property are valid and no surprises pop up after investment. One form of due diligence is legal due diligence. What is LDD due diligence and what role does it play in real estate transactions?
What Is LDD Due Diligence?
Legal due diligence (LDD) in commercial real estate is the process of investigating, analyzing, and assessing all the documents of a property. It also involves interviewing all tenants, property managers, and other major associates in order to determine all legal risks that could be faced by an investor during and after property acquisition.
Unlike physical and financial due diligence, which have to do with an assessment of the physical and financial state of a property, legal due diligence is a longer process, and it demands a lot more money and professional attention.
The Importance of Legal Due Diligence
Legal issues can be very restricting and in the event that the courts get involved, it can drag for years. Any investor wants to avoid this, and this precisely explains why legal due diligence is as important as can be. In addition to this, a proper legal due diligence can mitigate risk as well as identify unharness value and liabilities.
A thorough assessment of a property’s documents, legal history, and current legal status gives you an insight into the kinds of risk that the property is prone to. With this knowledge, it would be easier to figure out ways to manage these risks before acquisition.
Identify Potential Values and Liabilities
Carrying out legal due diligence helps you to identify the strengths, as well as weaknesses of a property. This way, it is easy to put more effort into developing and capitalizing on the strengths to increase income. You could also conceive ways to use the weaknesses to your advantage or outrightly avoid them.
Although carrying out legal due diligence might be an expensive process, it eventually helps you to save some cash in the long run. It does this by ensuring that there are no complications with the transaction, which could lead to you having to spend more money on fees or lawsuits.
How to Carry Out Legal Due Diligence
Legal due diligence is a long and complicated process. If you are looking to conduct one for a property, there are the stages and activities that you should expect to go through. This series of activities mainly comprise the preparation stage, investigations, and then results which would be reviewed.
The preparatory stage has to do with the activities taken right before the investigation begins. This stage is vital, as it determines the scope and length of the process:
Hiring Legal Counsel
It is very important to find an experienced and professional real estate attorney to conduct and take charge of the due diligence. It might help to find one who has conducted due diligence for commercial properties similar to the one you are looking to purchase. Si Vales Valeo Real Estate is experienced in due diligence. Additionally, SVVRE can provide a number of vetted, recommendations for real estate attorneys.
Holding a Meeting With Seller
All parties involved in the transaction should meet to discuss important issues, such as the buyer’s expectation from the investigation, the scope of the investigation – if it is limited to specific documents/participants or not- and the duration of time the investigation will go on for.
After all of the above is agreed upon by all parties, then the due diligence can begin in earnest.
During this stage, the attorney goes ahead to gather all the facts available in the documents provided by the seller, as well as those gathered from interviews with the tenants and all other participants. The attorney may also visit the property to ensure that the building and its grounds tally with the information provided in the documents.
After all facts are gathered, they are investigated and analyzed to ensure that they are all real and valid. Finally, all the findings should be cross-checked to ensure that there are no errors.
Note that this investigation can only extend as far as the agreed scope and duration of the due diligence allows. If more time is needed, it has to be communicated to the seller, who then either approves or declines the request.
When the investigation is over, the attorney should present his findings to the buyer, highlighting all the major discoveries. Some things to look out for in the results are:
- The risks that come with acquiring the property,
- Its potential annual income, and,
- Whether or not it meets all legal requirements of the state in which it is located
After a thorough assessment, you can then proceed to make an informed decision on whether to purchase the property. You could also consult with a good realtor to give you sound advice on this investment. For example, if the property is in the Cincinnati or Northern Kentucky area, you could contact Si Vales Valeo Real Estate.
How Long Should Legal Due Diligence Last?
The required amount of time for legal due diligence typically depends on the property that is being inspected. For instance, for apartment buildings and multifamily commercial real estate properties, you would have to carry out interviews of all tenants and property managers, as well as review all lease documents and other documents.
This process might take anywhere between two to three weeks to carry out completely.
The main aim of legal due diligence is to know a property’s legal status to prevent or mitigate risks after finalizing a purchase sale agreement. To do this, it is best to involve an experienced legal counsel, as well as engage the assistance of a real estate agency that offers expert services, such as Si Vales Valeo Real Estate.