The Seller of a real estate development makes a number of documents available in a Virtual Data Room (VDR) for the Buyer’s commercial, legal and technical teams to review in connection with a transaction. The purpose of this is to adequately present what is being sold and to identify any risks inherent in the transaction. However, the contents of the VDR do not always reflect the information a Buyer needs to know.
This has three significant consequences:
- The transaction process is prolonged and considerably more resources are needed to complete it
- The final agreement can end up containing a number of conditions that could have been avoided
- Insufficient information about the product being purchased will have an influence on the transaction price.
Learn from our 10 lessons learned
We have compiled a list of our top 10 observations from undertaking TDD reviews of over 1 million square metres of projects under development:
- Design Brief
The traditional construction organization is often compressed for real estate projects being developed for sale. Sometimes the Seller and the Contractor (typically a Turnkey Contractor) are from the same organization, albeit separated as two legal entities. Similarly, the role of client consultant – responsible for developing the Design Brief - is sometimes absorbed into the Seller’s own organization, rather than being provided by a separate consultant. This means that the Design Brief, that defines the property’s functional requirements, design specifications, design assumptions and refers to relevant standards and norms, etc. is rarely developed to the level of detail that would normally be expected.
The reasons for this can be several: maybe the project is “Copy-Paste” of an earlier project; maybe the parties involved all know each other very well; maybe this is done to limit initial consultant costs. Whatever the reason, the result is that the need for a detailed Design Brief is rarely considered necessary. As such projects are only at an early design stage this means that design development will continue after the project has been sold.
This is problematic for a TDD process, because clarity is needed around exactly which standards and requirements the project will live up to when complete. It is not enough to be informed that the project will be of standard quality and will conform with Building Regulations. Much more granularity is needed.
- Material List
In the first phase of a project being prepared for sale the Seller typically focuses on overall impressions and graphic presentations, including the architect’s renderings and sketches. Often a material list is compiled, stating which surfaces and finishes can be expected, focusing primarily on “Look and feel” for the end-user, comprising statements “such as xxxx or similar”.
We know that this document is a key document for the Buyer, as clarity is needed about the end product, despite the fact that the project is rarely at a mature stage when the property transaction is finalized. Granularity is needed around the product, including quality, longevity and inherent maintenance costs. Therefore the material list should also include details about the main building components, hidden from view and not just surface finishes.
Furthermore the building components should be specified to a degree of detail so that the Buyer is very clear about the level of quality being offered. If the Seller cannot provide the information then a reference building should be stipulated in the Purchase Agreement (SPA) as a quality benchmark, stating which products have been used.
We see a lot of standard structural details repeating from one project to the next, especially for residential properties. ”If it ain’t broke, don’t fix it”. We rarely have comments to these solutions. If problems arise later it is typically due to incorrect workmanship on site, rather than poor detailing. Our focus therefore is on the contractor’s Quality Assurance and Quality Control (QA/QC) plans to ensure checks are in place during construction.
- MEP services
It is quite typical for the Mechanical, Electrical and plumbing (MEP) services to start later in the development phase to the point where little thought has been given to principles and solutions at the stage when the project is subject to a TDD. This only goes to reinforce the message how important it is to have the MEP framework in the shape of a Design Brief in place, so that functional requirements and design assumptions are clearly stated, even if solutions haven’t been drawn up.
MEP services are pivotal for the end-user’s experience (as they are often the root of complaints during the first year of occupation) and can also have an impact on sustainability certification through DGNB, for example.
In the last year DGNB certification has become a “must” for overseas investors. We often see that most of the significant decisions affecting certification have been made by the time a project is up for sale. This is particularly relevant if the target is Gold or Platinum. It is therefore important for the Seller to consider certification from the outset, as it can be difficult to meet certification criteria at a later stage if the decision to achieve DGNB is made halfway through the design process.
- Review of the construction budget
Understandably the Seller is seldom willing to divulge the construction budget, particularly if the transaction is a ”Forward Commitment”, where the Buyer purchases a target company shortly after the project’s completion. But where the transaction is based on a ”Forward Funding” scenario, where the Buyer pays the contractor’s monthly invoicing as construction proceeds, then it is a condition that the Buyer’s representative has access to the budget when evaluating the value of the built works prior to each invoice.
In the TDD phase we look at the construction budget to assess whether all services are in included in the contractor’s scope and whether the budget is suitably robust. This includes contingencies set aside for unforeseen circumstances. Seeing how contingencies are allocated and drawn down throughout the construction phase is a useful parameter for monitoring and reporting on progress, so full access to the construction budget is important from the outset.
- Operation and Maintenance (O&M) documentation
The Buyer’s appointed Asset Manager (AM) takes over the operation of the project at completion. However, we rarely see that any thought has been given to the requirements for O&M requirements at the time then project is subject to a TDD.
The format, scope and platform for the O&M documentation can be quite significant for the AM, and yet it is rarely the case that a Buyer has an AM in place at the time a TDD is carried out. We find it a good idea to have O&M requirements stipulated in the SPA so that requirements are defined and costed by the Contractor.
- Documentation at Completion/Closing
Many overseas investors expect to see documentation that goes some way beyond that which is standard practice in Denmark. This includes declarations and warranties from various subcontractors, extensive photographic documentation, third party test certificates, etc.
This is important if the property is be sold to another investor at a later point in time. As these documentation requirements are beyond the norm from a Danish perspective then it is important to have the requirements stated up front, so that these services can be transferred to the subcontractors via the Contractor and costed accordingly.
- Quality Assurance
Many Contractors choose to undertake site supervision themselves, rather than using the architect and engineer, responsible for the design. Investors are surprised by this approach, indeed consider it unnatural, as they come from an environment where third party control is the norm. Therefore it is important that requirements for QC plans are clearly expressed in the SPA, specifying scope, type and frequency of control activities that the Contractor’s organization will have to follow. Furthermore, the QC plans should be subjected to the design consultants’ approval, as they have first-hand knowledge of the assumptions upon which the project was based and its subsequent sensitivities.
The QC plans are incorporated into the SPA or the Turnkey Contract. Effort needs to be made to make QA/QC requirements formulated clearly, as this is an important parameter when it comes to reporting on progress during construction.
- Request List
A list of documents is typically sent to the Seller ahead of a TDD process, stating which documents we would expect to see available in the VDR. As the TDD process is carried out in a very compressed timeframe it is important that all these documents are loaded up from the outset. This is rarely the case. Consequently the TDD process often gets prolonged, which is of no benefit to anyone.
We recommend a pre-VDR meeting with the Seller so that we can explain which documents are needed and why they are important for a successful TDD process. Experience tells us that this pays dividends for both parties.