Conducting Due Diligence as a Private Lender: Essential Reports for Real Estate Investment Success

If you’re investing in real estate as a private lender, the completion of Due Diligence is a must. Environmental assessments, construction reports/monitoring, and valuation due diligence solutions can help you make informed investment decisions and avoid potential liability issues. For stakeholders, these reports provide essential information about the property’s environmental, physical, and valuation aspects, giving you a comprehensive understanding of any potential risks and opportunities. Don’t take any chances when it comes to your investments – always conduct due diligence!

The recommended due diligence is specific to the transaction. Environmental solutions for due diligence may include Desktop Environmental Reports, Transaction Screens, Phase I and Phase II Environmental Site Assessments (ESAs), Remediation, as well as risk management services. Construction solutions may involve project management, quality control, progress assessments and cost estimating services, among others. Valuation solutions include Appraisals, Appraisal Reviews, Commercial Real Estate Evaluations, and Appraisal Validation Reports. Each report serves a different purpose in the protection of assets.

Environmental Due Diligence  

Preliminary environmental due diligence is a crucial step in assessing potential risks and ensuring that lenders can make informed decisions about their investments.  This is especially true for private lenders, who rely on the value of the properties they finance. Environmental risk can impact the value and marketability of properties, while also posing potential legal and regulatory exposure.  Evaluate the risk by running Desktop reports, Transaction Screens, or Phase I Environmental Site Assessments before finalizing transactions. 

Desktop Environmental Reports: Desktop reports are suitable for analyzing properties with innocuous current and past site activities. Desktop reports can also be used as an updating or screening tool. This level of report can include a database search for federal, state, and local environmental information, historical and municipal research, interviews with the property’s owner/operator, and an assignment of a Low or Elevated Risk Assessment by an Environmental Professional. For more information on Desktop Environmental Reports, check out Low-Cost Environmental Report Options for Small Balance Loans

Transaction Screen: This report is often used on any property type . The report features a thorough site inspection by a qualified environmental analyst, historical research to 1940 or first developed use, review of previous environmental reports, owner/operator and municipal research, database searches for federal, state, and local environmental information for the area of the subject property, reviewed by an Environmental Professional, and an identification of Potential Environmental Concerns (PECs).  While not required under the ASTM Transaction Screen standard, cursory assessments for radon, suspect asbestos, lead-based paint, and mold are also commonly included under this level of report. 

Phase I Environmental Site Assessment: A Phase I ESA provides the most thorough assessment of a  property’s historical and current use, as well as an analysis of the surrounding area’s potential for contamination, under the ASTM Phase I Standard. This level of report is recommended for the purchase of a property, or for properties with current or historical operations of environmental concern, as it is part of the process to qualify for landowner liability protections under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).

How it Helps

Environmental Due Diligence helps investors avoid potential risk and liability issues associated with environmental contamination. If a lender provides financing for a property that is later found to have environmental contamination, the value and marketability of the property may be negatively impacted, and entities involved  can be held liable for cleanup costs and legal fees. By conducting preliminary environmental review, potential environmental risks associated with a property are identified upfront. This assists lenders to make informed decisions about whether to provide financing, if additional environmental assessments or remediation measures will be required before closing the loan, or for evaluating options in potential foreclosure situations. 

Construction Due Diligence Reports 

Construction Due Diligence reports are detailed assessments conducted by third-party professionals to evaluate the physical and financial aspects of a construction project or property. These reports are used by investors, lenders, and other stakeholders to gain a comprehensive understanding of the property or project’s condition, risks, and potential for success.

Plan Specification and Cost Reviews: A PSCR is prepared as part of the pre-construction phase of a project and used to evaluate the design plans, specifications, and estimated costs.  

Construction Monitoring (aka Draws): Draw reports are prepared during the construction phase of a project and are used to monitor the progress of the construction work. Consistent draw inspects ensure that the construction  is proceeding according to plan and that payment reimbursements accurately reflect the work completed. 

Property Condition Reports:  A PCR provides a physical inspection of building, site systems, and components, along with projections for repair or replacement costs associated with any deficiencies identified during the investigation. It is completed in accordance with latest ASTM or client standards and can be tailored to meet client or project-specific needs. 

How it Helps

Construction Due Diligence reports provide a wealth of information to stakeholders, including the condition of the property or project, potential risks and issues, estimated costs, progress evaluation, and timelines. For private lenders, in particular, these reports are crucial in identifying any potential financial and physical risks that may impact the property’s value or their ability to recoup their investment in the event of a default. By conducting thorough due diligence, lenders can mitigate their risks and make more informed lending decisions.

Valuation Solutions 

Commercial Real Estate Valuation Services refer to the process of determining the value of a commercial property for various purposes; including sale, purchase, financing, taxation, insurance, and legal proceedings. These services are typically offered by professional real estate appraisers, who use various methods and techniques to assess the market value of the property.

Appraisal: This report is an independent and impartial opinion of the value of the property, prepared by a licensed or certified appraiser. It involves a thorough analysis of the property, market conditions, and comparable sales or leases in the area. 

Appraisal Review: The Appraisal Review is a second opinion or critique of an existing appraisal report, conducted by a qualified appraiser to assess its accuracy, completeness, and compliance with the relevant standards.

Commercial Real Estate Evaluation: A comprehensive analysis of the property’s physical, financial, and market characteristics to determine its current and future value. It may involve the use of various valuation methods, such as the income approach or sales approach, depending on the property type, location, and market conditions. An Evaluation entails an Exterior and/or Interior site inspection.

Appraisal Validation Report: A review of an existing appraisal report to ensure that it complies with applicable regulations, guidelines, and industry standards. It may also involve an analysis of the appraiser’s qualifications, experience, and professional conduct.

How it Helps

Valuation solutions can help private lenders determine the property’s value and potential profitability by providing an independent and objective assessment of the property’s market value. This information can help lenders make informed decisions about the loan amount, interest rate, and loan-to-value ratio, based on the property’s risk and potential return on investment. Valuation solutions additionally help lenders identify potential issues or risks associated with the property, such as environmental hazards, zoning restrictions, or title defects, that can affect a site’s value or marketability.

Conclusion

In conclusion, sound Environmental, Construction, and Valuation Due Diligence policies and procedures are critical for private lenders to aid in the mitigation of risks commonly associated with the real estate investment process. Environmental Due Diligence helps lenders identify potential environmental hazards or liabilities associated with the property. Construction Due Diligence ensures that the property is in good condition or that a construction project has been properly estimated and is progressing as planned. Valuation Due Diligence provides an independent and objective assessment of the property’s market value and potential profitability.

By working with professional environmental, construction, and valuation solution providers, private lenders can ensure that they have a comprehensive understanding of the property’s condition and value, and make informed decisions based on reliable and accurate information. 

And as always….

LCS listens to your needs to develop products that are right for your lending transaction. Whether that be an individual appraisal, environmental or construction report, or a combination of services;

LCS will meet your needs in the most efficient, effective way possible.

To learn more, reach out to Liz Mahoney, Director of Sales & Business Development today.

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