Doing due diligence is a must for managing risk when you invest in and/or repurpose commercial property.
What is due diligence and why does it matter?
Due diligence is the research and analysis undertaken before investing in a property to uncover any inherent risks and issues. It should be one of the first tasks you tick off.
If there are problems – related, say, to structural issues or code compliance – you’ll want to discover them early, so that they do not compromise your investment or business strategy.
The last thing you need is for nasty surprises to crop up when you’ve already brought in your builder or architect.
Put another way, doing thorough due diligence brings peace of mind and gives your investment plans a rock-solid foundation.
Compliance categories to be aware of
Earthquake (EQ) resilience is a particular issue in New Zealand; buildings known to be EQ-prone should be thoroughly investigated to assess the implications and costs of strengthening them.
As a first step, you can check the government’s online Register of EQ-prone buildings: any building on the list will have an NBS rating (expressed as a percentage of its strength relative to New Building Standard), plus a deadline date for achieving compliance.
But there are many other situations that could catch you out.
For instance, if you plan to repurpose a building (it could be a new purchase or one you’ve had on your portfolio for years), you need to look at change-of-use issues, such as fire safety, accessibility (e.g., for disabled), planning considerations, and building code compliance – any one of which could lead to lengthy delays in your investment strategy.
And you will need to ascertain from the local council whether your intended change of use complies with the requirements of the Building Act 2004.
In this introduction to our series of articles on due diligence, we will tackle the key questions in order to put you on the right footing.
Why are you investing?
It is useful to confirm your objectives: investment only, property development, or business operations? This will help you prioritise action and convene your team.
For instance, if your profit forecast depends on the building being in use, then bringing it rapidly up to operational spec is going to be critical.
If you’re factoring in a change of use or EQ strengthening, you will need to revise your budget and schedule accordingly.
Who’s responsible for due diligence?
Due diligence is down to you, the building owner – but it will also involve a number of specialist consultants (plus, as already noted, the council). These may include a lawyer, building surveyor, structural engineer, architect, valuer, insurance broker, and/or others.
Ultimately, the team you need will depend on your property type and your objectives for the investment.
When should you do it?
By now it should be clear that to manage risk effectively, your best tactic is to ‘go hard, go early’ on due diligence. You can do it before or after making an offer on a building – but if you do it afterwards, include a due diligence clause in your offer so that you can safely withdraw if your investigation raises issues.
Necessity, they say, is the mother of invention, and sometimes compliance issues will force your hand. Be prepared to adjust your objectives – whether it’s redesigning an interior around mandatory access points, or rethinking the exterior to comply with council requirements. Whatever due diligence brings, you need to allow time to convene with your team, do it once and do it right.
About the author
Sally Woods is a registered architect based in Wellington and owner of Unit 7, an NZIA practice helping commercial property owners maintain the integrity and profitability of their buildings by streamlining design, maintenance and compliance. Specialist areas include due diligence before purchase, building compliance, earthquake strengthening and change of use.
Disclaimer: This article provides general information on property compliance and is not intended to be used as a substitute for professional advice, as every building needs to be assessed on a case-by-case basis. The author disclaims all liability in connection with any action that may be taken in reliance on this article, and for any error, deficiency, flaw or omission contained in it.