Books/Info on DD & Closing

Sure thing - just keep in mind that this is heavily from the POV of a lender:

Appraisal:

• Property Taxes - most lenders will look to the appraiser for how to underwrite property taxes. On an acquisition, they will pull comparable sales from 1 - 3 years prior to see what happened to assessed value relative to the known sale price. On a refi, if the current assessed value is far below comparables, an upward adjustment may be made as well. The way that property taxes get determined in the appraisal is a relatively crucial unknown that can make or break a transaction (from a financing perspective). From my perspective as a lender, we try to have upfront conversations with appraisers and also pull our own comps so we don't end up with a huge surprise 3 weeks down the road.

• Expense Comps - All appraisal reports will include a set of expense comps for nearby, like-kind properties. These comps, as well as the current operations, play a role in how the appraiser determines their expense load in their direct capitalization section. Some lenders may be inclined to default to an appraiser's per unit expense conclusion for certain controllable expenses, which may be greater than the T12 actuals, which can also impact a transaction. This section of the report is somewhat of a grey space, but something to be considered.

• Value / Cap Rates - An obvious pitfall in all refinances today. Appraiser's have a lot of discretion in what sale comps they use to bracket certain valuation metrics (cap rate, $ per SF, $ per unit). The industry has tightened up a lot in regards to how much we can push back on some of these assumptions, and appraiser's are certainly being more conservative these days. A miss on value in a refinance scenario can really derail a deal. Most refinances rely on a lender placeholder for value, but we can never be certain that an appraiser will use a similar cap rate or expenses that what we think are reasonable. 

Phase I:

• General Findings - Most, if not all, Phase I reports will focus in on a few industry acronyms - REC (recognized environmental concerns), CREC (controlled recognized environmental concerns), HREC (historical environmental concerns),  and BER (business environmental risks). RECs are environmental concerns present at the property, CRECs are known environmental hazards that have either been property mitigated or are being mitigated under specific controls, HRECs are past CRECs that have been fully cleared and no longer hinder the property, and BERs are for less regulated corners of environmental risk (IE mold, radon) but can have a direct impact on the asset / tenants. The Phase I consultant will run the property through multiple data base searches to assess these risks. They will also ask to receive all prior environmental reports as a cross check, but it can be hard to get that information if its being held by an outside party or if prior reports were done before the modern digital age.

• Common Issues - Include things like radon exposure, mold and moisture management, lead pipes, asbestos, underground storage tanks, onsite power generators, etc. Most Phase I reports on multifamily will require radon testing in a sample of ground floor units. There are certain states that require radon testing on 100% of the ground floor contacting units, which can add significant cost & headache to the transaction. If test results for the charcoal canisters come back above a certain level, either additional testing or the installation of certain mitigation systems may be required. Radon is becoming a bigger and bigger headache in the industry and is something to be aware of. The testing requirements are very specific, and it is easy for an onsite team or tenants to fuck with the process and complicate this portion of the report. The other things I mentioned either have to do with an assets age (asbestos, lead pipes) or observations during the consultants onsite inspection. Most of the time, the discovery of these things simply necessitate that the property owner agree to adhere to an O&M plan (operations and management plan) when dealing with these certain materials.

• Less Common Issues - Mostly include some form of sit contamination (soil, water, etc.). Can be caused by nearby uses such as adjacent gas stations, dry cleaners, etc. Can also be caused by a prior use of the site. 

PCA 

• General Findings - The main purpose of the PCA / Engineering report is to identify any required repairs and determine the annual reserve for replacement constant. 

• Required Repairs -  Often gets broken down into Life Safety, Critical Repairs, and Priority Repairs / Deferred Maintenance. Life Safety repairs will need to be address immediately, possibly before closing. Critical repairs are things that pose a risk to tenant safety (think cracked stairs, uneven walkways, loose railings) and will need to addressed shortly after closing (1-3 months). Priority repairs are things that are either smaller ticket or just starting to show signs of stress. This can be a parking lot that needs to be resurfaced, or an ADA parking spot missing proper signage. Will need to be addressed within 6 - 12 months. Each repair will also include a cost estimate for remediation, which is often what dictates the amount of escrow a lender may require at closing to hold back to ensure the work gets completed. 

• Reserve Table - This is less of a material pitfall, but the PCA report does conclude what $ per unit needs to be collected every year to be held in the lender replacement reserve fund. That conclusion also flows through to loan sizing, but a material miss is uncommon when dealing with most lenders (I.E $250 at underwriting but actual reserves of $275/unit). 

Zoning 

• General Findings - Main purpose is to confirm that a property's use is legally permissible as-to zoning and that the improvements legally conform to current building codes (parking minimums, setbacks, density, etc.). If a property is older and doesn't meet current building codes, it will be deemed a nonconforming use. This means that you will need to carry Ordinance & Law (O&L) insurance coverage, which would cover the additional cost to rebuild to code in the event of a >50% loss to a structure. The report also will include responses from varying regulatory bodies opining on if there are any outstanding violations (zoning code, building code, fire marshal, etc.)

As Pokemon Master mentioned below - ALTA surveys are a huge pain in the ass because the final language needs to be hyper specific to the title policy which can be negotiated right up until the 11th hour. The main risk with survey's is mostly related to timing...