Real estate finance due diligence

A lender in considering whether to finance a land acquisition or project needs to assess the “bankability” of the acquisition or project. Due diligence is a necessary part of understanding the risk profile of the project and the source of cash to repay the loan. Due diligence will be carried out at many different levels.

Due diligence is a critical aspect of project or real estate financing. In a land acquisition, the lender needs to determine the source of cash for repayment — whether it be through sale or refinancing or through development of the land. Given that the lender's recourse is limited to project assets (there may also be some corporate or personal credit support) and that the cashflows of the project are the primary source of repayment, it will need to understand the risks inherent in the particular project and be satisfied with how those risks are allocated and mitigated.

In other words, the lender is concerned with risk allocation inherent in the underlying contracts, the creditworthiness of the counterparties and the credit support provided in respect of those counterparties' obligations, as well as any risk to the quality or quantum or revenue streams (be it sales or leasing milestones or operating licenses).

Due diligence is the primary means by which the lender can assess and price the risks inherent in the project — particularly site and environmental risks, but also delivery risks which may affect time and cost and risks which might impact the quantum and quality of cashflows in the projects' operating phase.

This guidance note will discuss the purpose, nature and scope of real estate finance due diligence principally from a senior lender’s perspective.

See Real estate finance due diligence.

Legal due diligence in real estate finance transactions

In addition to the property-related aspects of a real estate finance transaction, a lender (or its lawyers) must conduct due diligence on the legal aspects of the transaction. This guidance note details the following components of such legal due diligence:

• • the contractual framework; and
• • the legal framework.

See Legal due diligence in real estate finance transactions.

Development finance due diligence

If a transaction involves the financing of the development (or construction) of a property, a lender will need to conduct additional due diligence on the following:

• • the building contract and any other development documentation;
• • consultants’ reports in relation to geotechnical, environmental, financial, legal, engineering, survey, insurance, valuation and any other matters associated with the development; and
• • the financial model (prepared by the borrower or sponsor) detailing all construction, development and financing costs and the expected market or other returns following completion of the development.

This guidance note provides detail in relation to each of the above.

See Development finance due diligence.