Lenders Due Diligence
Private Equity Professionals:
Due diligence can apply to the process of verifying the information in a loan submission request or can be as much as performing a complete investgation or an analytical review that precedes a commitment to lend or enter into an investment arrangement. The purpose is to determine if the request is attractive enough and to measure the underlying risks and issues which may pertain to a potential investment. Due diligence empowers investment professionals with the tools to realize an effective decision process and optimize the terms of a deal. The procedure is of critical importance and is standard practice. It is the responsibility of the client to provide all the requested information and cover all expenses necessary to conclude a positive due diligence investigation and review.
Lender’s Due Diligence:
This is a subject that is little understood by borrowers. However, although this explanation may not do justice to the subject, it will arm you the borrower with some understanding of the subject to help you prepare and to soften the shock of the Letter of Intent (LOI). It is customary for the lender to send the LOI to the Consultant/Intermediary to be forwarded to the borrower. However, the borrower must understand that the Consultant/Intermediary has nothing to do with the LOI and has no authority whatsoever to make any changes to the Investor(s) LOI. The LOI is produced by the lender based on the lender's own independent investigations and willingness to offer to fund a deal based on certain conditions and criteria that must be met by the borrower. The LOI is strictly between the Lender/Investor and the borrower, so do not blame the bearer of good and not so good news. When a lender offers a Letter of Intent it means that the lender has provided the borrower with a temporary approved commitment to fund, but certain terms and conditions have to be met which are spelt out in the letter, such as due diligence or third party fees, rate, commitment fees, consultancy fees and more. All the terms and conditions in the letter must be met satisfactorily before any funds are released. Lenders have to do their due diligence and must pay for third party fees such as airfare, ground transportation, hotel accommodation etc. for their visit to the site of the project, meet with the principals to discuss and clarify any outstanding issues. A lender can be in your country or town for a day, or maybe a week or more. No one knows for sure of the length of time. Only the lender can determine the length of time that will be spent on a site visit based on unique circumstances which pertain to the project. A lender may travel alone or with a team of experts. There are also attorney fees for preparing the legal documentation and in most cases almost all those items on the page "How To Get Funded" under the subheading "Availibility of Third Party Documentation" that may be outstanding. Only the engagement of an MAI appraiser can give the true cost of an appraisal. A loan commitment if it consists of land and buildings requires an up to date appraisal. An appraisal a year or two years old may help to prepare documentation but an up to date current appraisal is mostly required. Some lenders may accept a appraisal no more than six months old. Again, a lender may have to travel with some experts like an appraiser, an environmental engineer or others who will review market surveys, site surveys, business plan validation, entitlements, zoning etc. and make sure that all other government requirements and other basic documents previously submitted are satisfied. Only the lender/investor can determine how much the fee will be, which is based on several factors which are always documented in the letter of intent/interest (LOI) and discussed one on one between lender/investor and the client during the initial conference call or a direct call by the borrower to the lender. Only after the due diligence investigation has been successfully concluded that a final commitment letter is issued to move the process to the final funding stage. A broker/consultant does not know and cannot determine what the due diligence will be until the LOI has been issued. Any due diligence amount stated by a broker/consultant must not be taken seriously as it is nothing more than speculation.
Funding will not be approved, placed or disbursed until all necessary third (3rd.) party reports and all required commitment exhibits have been received, in order to substantiate and support the foundation of the debt placement.
Site Visits: Borrower has to make the necessary arrangements for inspections of the subject property and provide access to the property records that the lender or lender's representative perceives reasonable and necessary on site and at the borrower's offices or wherever the records are kept.
Cost and Expenses: The borrower has to pay all costs and expenses incurred in connection with a commitment, preparation and closing of the loan, whether the loan is closed or not including Appraisal Fees, Market and Feasibility Studies, Engineering Examination Fees, Environmental Audit Fees, Inspection Fees, Surveyor Fees, Legal Fees including fees of Legal Counsel of the lender, Lender Loan Fees and all out of pocket expenses related to the loan.
Reports: Approval of a loan is conditioned on satisfactory completion of the following in accordance with the lender's specifications and requirements.
General reports are MAI Self Contained Full Narrative Appraisal, current within six (6) months, Engineering Report, Environmental Report, Phase One or Phase Two (if necessary) Independent 3rd. Party Market and Feasibility Study, Site Inspection Report, Credit Reports, Background Checks, Insurance Coverage Review Report and the Loan Commitment Exhibits.
Construction requires Permits and Approvals, Final Construction Budget, Architectural Contract, Contractor's Construction Contract, All Consultants Contracts, ALTA Property Surveys, Geological (Soil) Study Report.
Now that you have a basic understanding of due diligence, be prepared to budget for this expense in advance. Due diligence is not included in the loan and cannot be paid at closing. Independent third party officials that perform certain services have to be paid. The borrower is responsible for those expenses which must be paid directly to the lender along with the execution of the document (LOI) which is usually time sensitive. This has nothing to do with our fee which is paid in escrow at closing.