Due Diligence

On behalf of our financial partners before submitting documents to them, we are responsible for confirmation of the project owner, documents and the status of properties/projects. We must complete the Due Diligence forms on the site visit and provide them, along with photos of the project and the project owner, to our financial partners. Otherwise, your project will not be reviewed and will be rejected.

This introduction to due diligence covers the basics concerning due diligence. Please pay attention to the following:

What is Due Diligence?

Due diligence is used to investigate and evaluate a business opportunity. The term due diligence describes a general duty to exercise care in any transaction. As such, it spans investigation into all relevant aspects of the past, present, and predictable future of the business of a target company. Due diligence sounds impressive but ultimately it translates into basic commonsense success factors.

Due diligence is an investigation or audit of a potential investment or product to confirm all facts, such as reviewing all financial records, plus anything else deemed material. It refers to the care a reasonable person should take before entering into an agreement or a financial transaction with another party.

Due diligence can also refer to the investigation an investor/bank does of a project owner; items that may be considered are whether the buyer has adequate power to get financing for the project, as well as other elements that would affect the acquired entity or the investor/bank after the investment has been completed.

In summary, duty of the investor to gather necessary information on actual or potential risks involved in an investment. Due diligence is an investigation of a business or person prior to signing a contract, or an act with a certain standard of care.

Why is Due Diligence Conducted?

There are many reasons for conducting due diligence, including the following:

  • Confirmation that the business is what it appears to be;
  • Identify potential “deal killer” defects within the project to avoid a bad business transaction and non-financing of the project;
  • Gaining information which will be useful for valuing assets, defining representations and warranties, and/or negotiating pricing & the interest rate;
  • Verification that the transaction complies with investment or acquisition criteria;
  • The Due Diligence phase of a transaction is conducted in the order specified on our checklists and worksheets, to summarize information found in conducting thorough review to verify the project owner, seller’s title and the status of any and all properties/projects;
  • Conducting proper Due Diligence may serve as a strong legal defense to any claims after a transaction closes. Due diligence may also reduce legal issues by alerting a purchaser or investor to potential liabilities that can be mitigated in various ways prior to closing the transaction;
  • The Due Diligence Forms are used to close a transaction or get financing for the projects, as provided in a Purchase and Sale Agreement;
  • and it often occurs that a project is excellent, however due to lack of a few documents it will not receive funding and will be rejected. Usually, financial institutions and banks will not tell you the problems of your project and the reason for rejection.

Who Pays for Due Diligence?

The loan process often does not proceed beyond the point where the lender/investor notifies the loan seeker that he/she will have to bear the costs of performing due diligence on the loan evaluation.

Commercial Loans Funding is a more complicated process than getting working capital for the small business. You, the loan seeker, are asking lenders/investors to risk their money on your project.  The lenders/investors expect you to come into the transaction with a strong financial statement, experience in the related business and collateral to secure the loan.

Some are legitimate costs incurred in processing your loan application. You must be realistic here. It will cost money for a lender/investor to thoroughly evaluate your commercial loan proposal.

The lenders/investors are not going to pay these costs for you. You, the loan seeker, are expected to be financially capable to pay any due diligence costs incurred, in order for the lending process to continue.

Why Can’t The Loan Seeker Pay The Due Diligence Fees At The Close Of The Loan?

The investigation and evaluation of your loan application may often require travel to your project site, meetings, appraisals, permits, legal fees, etc.  Third parties, such as appraisers, accountants, architects, consultants, engineers, lawyers, surveyors, and government officials are needed to accomplish these tasks.  Each one of these professionals has to be paid for their work at the time the work is completed.

Look at it from the lender/investors’ perspective.  If they review hundreds of loan proposals each year and the cost of evaluating those proposals range from $50,000 – $200,000 per loan proposal, you can see that bearing those costs could not be sustained by any lender/investor.

Special Notice about the first site visit (project inspection):

  1. After receiving the full package(s) for the project(s), the owner of the project should invite us for a face to face meeting, physical site visit for the project(s) and the signing of all required contracts. The owner of the project also has to sign a confidentiality / non-disclosure / non-circumvention agreement, to protect mainly their interests at this early stage. We ascertain beforehand whether a project is worthwhile to pursue, as we do not wish to waste our time.
  2. The site must be visited and ownership must be proven by the applicant.
  3. We must meet the Client on site (a legal verification requirement).
  4. The first site visit, by at least two of our senior executives, remains mandatory for legal reasons and serves to:
  • Meet the client, as well as any partners or management teams and physically verify the accuracy of the project ideas proposed.
  • View the site(s) and its surroundings with the client.
  • Meet local officials and to ascertain to what extent this project is known of and welcomed.
  • View all plans/studies/documents/drawings/tests/surveys, as completed and are available, and enquire about planning & building laws enforced locally.
  • Confirm all future procedures/timings/requirements with the client, as well as assisting in determining the future development costs and timing issues.
  1. Many general project questions cannot be answered UNTIL WE HAVE MET AT THE SITE VISIT. We are unable to deviate from this procedure.
  2. After completion of a site visit, we will issue a written Observation Report, free of charge, summarising all our findings and outline moving forward.
  3. At the site meeting, our aim is to meet the executives, view the site, meet local authorities, etc and thus form a definite view of how to recommend to the client to proceed. We also look carefully at the proposed future management structure. All in all, we verify the client’s position, the projects existence and past statements made by the client, by means of our written meeting agenda issued beforehand.