Thorough due diligence reviews essential

Posted On Friday, 24 May 2002 10:01 Published by
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FLAWS in presale due diligence reports are knocking capital returns in portfolios held by many property-owning firms

FLAWS in presale due diligence reports are knocking capital returns in portfolios held by many property-owning firms, says Courtwell Consulting director Jonathan Smith.

He points to a number of oversights that can dilute the real value of portfolios. In some cases a medium-sized Agrade office block can experience dilution of up to R10m, says Smith.

'In many cases, buyers are paying way over the top for buildings they believe are producing higher yields than they actually are.'

Many sellers could also achieve significantly better prices for their buildings on the basis of the increased value that properly structured audits and due diligence reviews can unlock, says Smith.

'When you consider that the acquisition of a commercial property is tantamount to the purchase of a cash stream over as long as 12 years, mistakes and miscalculations can be extremely costly,' Smith says.

A series of recent audits and reviews of buildings in the greater Johannesburg area revealed pitfalls and problems including unenforceable bank guarantees, leases with major tenants that did not exist in law, computer systems not programmed to pick up escalations and increases in rates, and taxes not passed on.

Other oversights include underrecovery of electricity charges and overpayment for security and cleaning services.

Audits can also identify building discrepancies in zoning, title-deed problems, and water and subsidence threats.

One audit showed that a property group was losing R500000 a month on its electricity bill: a taxi rank was tapping into the electricity system of one of its buildings, and the owners of an office complex were paying the neighbour's electricity bill with its own, says Smith.

Publisher: Business Day
Source: Sibonelo Radebe

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