Why is a DUE DILIGENCE audit and transaction structure selection crucial? 

Real estate transactions are becoming more commonplace today. We buy plots of land, apartments, and commercial premises. Ideas for investing in real estate are numerous and varied, as we may observe.

WHO INVESTS IN REAL ESTATE?

Generally, everyone: individuals, SMEs, companies, and large corporations. The Polish real estate market remains attractive to both Polish and foreign investors.

DOES THE COMMONNESS OF TRANSACTIONS MEAN THAT they are easy and don’t require specialist knowledge?

DOES THE VERY FACT THAT EVERYTHING LOOKS CORRECT IN THE LAND AND MORTGAGE REGISTER MEAN THAT it’s secure?

DOES THE FACT THAT THE REAL ESTATE AGENT has done a lot of efforts to FIND AND RECOMMENDED this real estate to you, AND THE NOTARY SHALL PREPARE THE CONTRACT, MEAN THAT your interests have been protected and secured due to the circumstances of this particular transaction?

… DEFINITELY NOT!

It doesn’t matter how many transactions you’ve completed, or how ordinary or repetitive they may seem, none of them are ordinary or the same. This is precisely what my many years of experience demonstrate, and what my clients repeatedly experience. One seemingly insignificant element of the transaction, or a slight difference in the circumstances—that’s all it takes to transform a seemingly „ordinary transaction” into one with a more complex or completely unusual course.

WHAT TO SECURE YOUR INTERESTS OF AND HOW TO PREPARE?

It’s essential to ensure:

• a reliable and thorough audit, which we real estate specialists call „due diligence,” and
• structuring your planned property purchase so that:
  • Firstly, it allows you to conduct an audit tailored to the type of transaction.
  • Secondly, it effectively guarantees you the right to purchase the property if the audit is successful.
  • Thirdly, it gives you the opportunity to take additional steps (e.g., conduct selected administrative procedures or make additional arrangements or agreements) before the purchase.
  • Fourthly, it guarantees you the right to withdraw from the purchase if the audit or the additional actions or procedures you undertake indicate that this purchase will not allow you to achieve your intended goal.

I VERY OFTEN HEAR…

“Madam, we (I) just want to buy a few apartments… from the developer…”

“One plot of land for the construction of a semi-detached house…” “a plot of land so that we can expand our company on it in the future…” “I’m not a giant, it’s a simple purchase… and we’ve already checked the land and mortgage register…” it looks okay.” “Please check the contract, actually, there probably won’t be much there to be checked or modified …” And that’s when it turns out there is… quite a lot!

Most often, the changes concern the terms of the contract itself, or rather the contracts, as there are usually more of them, as well as the subject matter of the contract itself. The result? The property requires additional verification, and the transaction model undergoes
a significant redesign.

DUE DILIGENCE AND A TAILOR-MADE STRUCTURE – FANCY OR NECESSITY?

Necessity! No two transactions are identical in the same circumstances. Each time, the audit and the transaction structure must be tailored individually. Of course, there are constants, certain basic issues, the bare minimum. But this is only the foundation on which we must build both the Due Diligence structure and the transaction structure.

The PURPOSE of due diligence IS:

• to verify whether the investment you’re planning is what you’re looking for and
  whether it truly aligns with your goals,
• to show you whether and what risks you, as an investor, must expect when entering into this specific transaction. This is important to you because, thanks to thorough due diligence:
  • you can realistically assess whether you’re willing to accept these risks, whether their level is acceptable to you, and whether the investment remains equally attractive.
  • you can use the identified risks to your advantage in business negotiations.

DUE DILIGENCE SCOPE AND TRANSACTION STRUCTURE – WHAT DOES IT DEPEND ON?

Absolutely everything. The scope of due diligence and the transaction structure are influenced by every single detail, starting with:

• Who are the parties to the transaction, and what are our interests on both sides?
• What is the subject of the transaction?
• Where is it located?
• What is the purpose of the acquisition and the financing model for the entire investment?
• What is the timeframe for closing the transaction?

Each investment has its own unique characteristics.

The seemingly simple „developer purchase of a property,” although regulated separately, can prove challenging for the investor after signing the contract. Such a transaction also requires considerable care, knowledge, and experience. It’s not just the purchase of the apartment or flat. This is also the entry into a whole construction (investment) project, where the purchased property is only a part of something much bigger, whether we like it or not. Reviewing the development agreement is not enough to properly assess the risk. Discrepancies in documentation. Investment phasing. Changes to the project during the investment. Real rights and obligations – mine and the developers. What I have influence over and what I don’t. Is what
I get is really in line with the agreed arrangements? These are just a few of the issues that should be carefully considered.

Going further, purchasing a plot of land to carry out a specific investment, such as building on it one or more two-unit single-family homes, or building a warehouse or industrial facility, shall be quite different from purchasing a “development property”. Therefore, the scope of due diligence and transaction structure required to be tailored accordingly.

The same issue refers to the purchase of a developed property with a commercial building to which you plan to relocate your current business while simultaneously changing the way use such real estate or to the purchase of undeveloped land with a building permit and construction design already issued. On the other hand, preparing for a brownfield investment is something completely different. Each case requires individual approach.

What all these investments have in common is the need to ensure security and compliance with the investor’s intended goal.

Conducting thorough due diligence and tailoring the transaction structure to individual needs is a necessity and a risk management tool.