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22
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22 (117) 2015
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Real Estate & Construction

Minimising the risk when buying real estate property

by Tomasz Dobrzyński and Artur Dziubak, Hill International Sp. z o.o.
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Buying a property can fall into one of these three categories:

1. Purchase of a land with no buildings on it – this is a green-field investment.
2. Purchase of a property, where construction works had started but have yet not been completed (project-in-delivery).
3. Purchase of a land with existing buildings on it – this is a brown-field investment. The year of building completion may vary from ‘just finished’ to ‘seasoned, long lasting’, through to heritage ones.

In each of these categories, the buyer has to deal with the various risks associated with the transaction. Some of them are of technical nature. 
As an engineering consulting firm, Hill International can help reduce such risks with the Technical Due Diligence audit.

For the first category – ‘green field’ projects – the due diligence inspection includes analysis of the land surveys, utilities and infrastructure availability; planning permit status; environmental and archaeological issues or comments on constraints of site development potential or any identified conditions that may affect severely the investment (eg. set-backs, easements, encroachments, influence of immediate neighbourhood, abnormal costs of investing, floods, etc). Eventually, the report provides a risk assessment of most obvious threats to investing on the site.

For projects-in-delivery – due diligence examination assesses risks associated with both formal and technical aspects of completing a construction process on time, in budget and to the planned quality. It will be concerned with the formal status of the planning and permitting process, status of design, advancement of construction works and budget spending. The analysis also comments on the organisation of the construction process, their participants, contracting terms, and assesses the likelihood of obtaining required approvals and decisions.

In the third category – existing buildings - Technical Due Diligence evaluates the formal completion of the construction process and analyses the existing premises against the ‘wear and tear level’. The inspection findings focus on reviewing the planning, design and construction phase documentation as well as guarantee status  and operational issues, and are complemented with the list of deficiencies requiring to be remedied followed by estimation of costs of necessary works to maintain the quality standards.

It’s worth mentioning that Technical Due Diligence findings can often be utilised either by 
- the client (potential purchaser) to evaluate attractiveness of the opportunity, or
- the potential funder of the transaction (usually the bank or other financial institution) to obtain an independent opinion on risks related to transaction.

Therefore, the key to the satisfactory Technical Due Diligence Report is it is prepared by:

  • reputable consulting firm, constantly proving the highest delivery standards to local and international Clients
  • company able to utilise the best cross-border practice and expertise
  • company capable to offer a qualified in-house team of all required disciplines

and most importantly by 

  • experienced practitioners, who understand the construction process inside out and who can reliably help their clients avoiding traps that may occur after the purchase.

To meet the market demand, Technical Due Diligence examination is usually carried out in two phases. The first one, known as the Red Flag Report, allows the client to get an overview of risks related to the potential transaction. Should no deal-breaker be identified, a Final Report provides for the detailed outcome of investigation, always documented with photographs.

The advantage of such approach is that the client is able to recognise potential pitfalls at the very early stage of the transaction and save on costs in case the opportunity did not fit into the expected criteria.

A Technical Due Diligence Report doesn’t substitute any legal or financial due diligence, which can be provided by entities specialised in their fields.
 

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