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A well structured physical due diligence program integrates the involvement of the technical representative into the investment decision making process from early inception through the term of the investment, providing the underwriters and investment decision makers with tools that increase the security of their investment. A well-structured program further defines the physical risks in a timely manner and quantifies them in a form that is meaningful to the investment process. It addresses the issues of appropriateness, accuracy and durability while providing an additional gauge to assess the commitment of ownership to maintaining the real estate over time. If properly structured and administered, it will minimize the impact of a market downturn upon the physical condition of the property. Its net result is an increase in the probability that each investment will remain economically successful through the term of the investment. It adds real value to the investment process. Specifically, a physical due diligence program should be structured to provide:
- Identification and resolution of major physical risks early on in the investment process.
- An understanding of the physical features appropriate to each investment to assure long-term user (tenant) satisfaction.
- A verification of the accuracy of the physical parameters of the investment,
- A means of assuring that physical problems will not impair market value during the loan term, so that take-out financing can occur.
- Insight into an owner's dollars-at-risk (basis) in the property as an indicator of his likely commitment to maintaining the property during a market downturn.
Following is an outline of the remainder of this chapter. It focuses on establishing and/or updating a physical due diligence program appropriate to your organization and integrating it into your investment process.
- Establishing Responsibilities for Defining and Implementing the Program.
- Outlining Existing Procedures for Performing Physical Due Diligence.
- Listing What Is Known About Problems Experienced in the Past.
- Planning a Program that Will Meet Your Needs.
- Setting Goals for Integration.
- Structuring for Success –-- Ongoing Education and Instruction.
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