Asset Inventory & Audit - Dikaios International · Due Diligence Definition An asset management decisional tool consisting of an iterative process verifying through research, investigation,

Asset Inventory & Audit

Paolo Baragatti, Prof. Eng. Johnny Velasquez, MBA Eng.

KeyConcepts

Haveyouclearlydefinedavisionforyourasset?

KeyConcepts

PassiveIsolatedactivity

Cost

As is F eas ibilityS tudy Dikaios 'S ervic es

As s et DueD iligence P otentialR ealE s tateMarket C urrentcondition Trends &Demand

Valuation Actual MultipleS cenarios

Des ig n&Permitting

Inves torR elations

Ac tion

Hig hes tandB es tUs e

MarketingS ales &L eas ing

P rofes s ionalC ons ultanc y&S trateg ic Advis ory

C omplianceRequirements orR epos itioning&Renovation

Pro-activeIntegratedpath

Value

Haveyouclearlydefinedavisionforyourasset?

DefinitionofVision&

AssetManagement

Asset–DueDiligence

Doyoufullyknowandmanageyourpropertyinaccordancetoregulatoryrequirements?

Areyouawareofyourproperty’smaintenancecosts&currentequipment’scondition?

Asset–DueDiligence




Des ig n&Permitting

Inves torR elations

Ac tion





Doyoufullyknowandmanageyourpropertyinaccordancetoregulatoryrequirements?

Areyouawareofyourproperty’smaintenancecosts&currentequipment’scondition?

DueDiligence

DefinitionAnassetmanagementdecisionaltoolconsistingofaniterativeprocessverifyingthroughresearch,investigation,and discovery the presence, validity, condition, and compliance of key legal documents, technical records, andfinancialinformationassociatedtoaspecificproperty.Objectivesü  Evaluatetheasset’scurrentconditionofcompliance.ü  Determineactionsandcostsrequiredtobringthepropertyintocompliance.ü  Identifytheasset’scurrentstateofmaintenance.ü  Determinetheasset’scurrentcostofmaintenance.ü  Estimateanyimprovementcostspermittedintheproperty.

Levelofanalysis

Report’sstructure

General description

OwnershipLease/Rental

contractsCadastral regulation

Urban & Zoning

Building permits &Certificates

Plant & Equipment

Safety

Preliminary

Detailed

Official records

Site visits, Inspections, Estimate of compliance & Maintenance Costs

NOTEThedifficultytobringtheassetintocomplianceincreasesastimegoesby

DueDiligence:Preliminary

Apreliminaryduediligencereportmustreviewandverifyofthefollowingtopics:

ü  GeneralassetdescriptionConsistsofathoroughdetailoftheasset’sregisteredcategory,typeofconstructionandbuilding,areas(gross,net,lettable, etc.), existing infrastructure and services present, commercial characteristics of the zone, architecturalplansanddrawings,andadequatephotographicdocumentation.ü  OwnershipreviewThe assets’s title to the property (Certificato di Proprietà – VisuraNotarile)may be obtained directly from theasset’sownerorfromthenotarywhocertifiedthroughanofficialact.Allcontentsinthetitletothepropertymustbeverified(property,propertynotes,mortgageregistrations,obligations,etc).

Levelofanalysis

Report’sstructureGeneral

descriptionOwnership

Lease/Rental contracts

Cadastral regulation

Urban & Zoning


Plant & Equipment

Safety

Preliminary

Detailed

Official records


DueDiligence:Preliminaryü  Lease/rentalcontractsreviewThe rental agreement or lease associated to the property can be obtained directly from the asset’s owner orauthorizedlegalrepresentative.Thecontractmustcontaindatarelatingto:durationofthecontract(ItalianDecree133/2014), rental fee amount with paymentmethods, any additional fees (condominium fees, utilities etc.), asecurity deposit amount or financial guarantee requirement, a clause specifying the conditions for contracttermination(breakoptions),thetermsforrenewal,theSingle,DoubleorTripleNet:(i)thepartyresponsibleforthe cost of extraordinarymaintenance, (ii) the party responsible for payingmunicipal taxes (IMU), (iii) and theinsurancepolicyrequiredü  CadastralRegulationsConsists of ascertaining using local cadastral records (Nuovo Catasto Terreni – NCT and Nuovo Catasto EdilizioUrbano-NCEU)theregisteredownertotheasset,parcel’s identificationonthecadastralmap,theassets’stypeandauthorizeddestinationofuse,classification,andanychangesnotyetofficiallyregistered.

ü  UrbanPlanningandZoningregulationsConsistsofascertainingtheintendedusedesignatedbytheofficeofUrbanPlanning(P.R.G.-PianoRegolatoreGenerale)andthepresenceofaDestinationofUseCertificate(DestinazioneUrbanistica-CDU),consistingofatechnicalvaluationcertificateandanylimits/constraintsstipulatedbytheofficeofUrbanPlanning.


ü  Plants&EquipmentConsists of evaluating the validity and authorizations for the installation of plants and equipment (former Law46/1990): Certificate of Compliance. Example: sanitary and sewer; electrical; gas; communications; heating andconditioning;liftsandconveyingsystems.

ü  Safety&HealthCertificatesThepropertymustpossessasafetyandhealthdocumentationcertifiedandprovidedbyalocalgovernmentalentity (ASL, Vigili del Fuoco, etc.). These certifications ultimately authorize the owner to carry out theproperty’sintendeduse.

ü  BuildingPermits&PerformanceCertificatesComprises the verification of construction permits associated to the property. It is important to list thehistoricalbuildingpermitrecordsinordertoguaranteethecomplianceofthebuiltvolumeandthepossibilityto request a new permit to the competent Authorities. It is necessary to verify the completeness of theadministrativeprocedureincaseofbuildingsanction(CondoniEdilizi–1985,1994,2003).Inaddition,thepropertymightpossesperformancecertificatesrelatedtoenergyefficiency,LEEDcertification,etc.i.e.APE(AttestatodiPrestazioneEnergetica).


SampleDocuments

VisuraCatastale

APECadastralMap

DueDiligence:Detailed

Adetailedduediligencereportmustascertainandevaluatethroughfieldinspectionstheactualconditionoftheproperty.Anycriticalissuesinherenttothepropertymustbeassessedandnotedbasedoncompliancetolocalregulations,ordinaryorextraordinarymaintenanceneeds,andsafety&healthrequirementsthatdeemtheassetcompliantornon-compliant.Asaresult,adetailedduediligencereportwillconstitutetheinitialdevelopmentofacomplianceorimprovementprojectprovidingadetailedestimateofthepossiblecoststobeincurred.Thefollowingchecklistisatoolusedtoreviewallitemsonthefieldinspectionreport.Inaddition,itassistsintheidentificationofcostsrelatedtocompliance(legallyrequired)andcostsrelatedtomaintenance.

Assessment ID Action

Compliant NoCost

Non-Compliant CostofCompliance

Levelofanalysis

Report’sstructureGeneral

descriptionOwnership

Lease/Rental contracts

Cadastral regulation

Urban & Zoning


Plant & Equipment

Safety

Preliminary

Detailed

Official records


AssetisNOTsellable/rentable

DueDiligence:Detailed

ü  Fieldinspectionplanningandexecution:Aimedatprovidingaqualitativedescriptionandatechnicalevaluationoftheasset’sactualconditionwithrespecttothedocumentationreviewedinthepreliminaryphaseoftheduediligencereport.Fieldinspectionsareconductedbytechniciansorcompetentprofessionalsaccreditedbylocalauthoritiesandwillgenerallyincludeareviewofthefollowingitems:Siteinspection(externalareasoftheproperty),StructuralInspection,Maintenanceroominspection*,Commonareainspection,FinishesandSystemsinspection,Roofinspection,etc.Itisadvisabletocarryoutathoroughcollectionofphotosidentifyingallareasoftheproperty.Wear-and-tearassessment.*Athoroughinspectionwillincludeaqualitative-quantitativeassessmentofthesystemspresent(age,registrationnumber,manufacturer,serialnumber,etc),anassessmentonthemaintenancehistoryofthesystems,andanycurrentconditionsthatmightdifferfrommaintenancereports.

ü  CostofComplianceAfterallfieldinspectionshavebeencarriedout,aduediligencereportwillincludeanestimateofthecostrequired,ifnecessary,tobringthebuildingintocompliance.Thisestimatewillconstituteanimportantconsiderationinthefinalvaluationoftheasset.

ü  CostofMaintenanceInadditiontomandatoryinspections,acostofmaintenancereportisadvisedasmeansofaccuratelyidentifyinganysignificantissuesthatdespitenotbeingalegalrequirementsforcompliance,mightconstituteaconsiderablecostfortheowner.Itispossibletodevelopanimprovementreport(example:energyoptimization)basedontheabovementionedtechnicalconsiderations.

Asset-Potential

Are you aware of your property’s potential opportunities based on regulatory, physical, andsafetyregulations?

Asset-Potential

Are you aware of your property’s potential opportunities based on regulatory, physical, andsafetyregulations?




Des ig n&Permitting

Inves torR elations

Ac tion





Potential

Thephysical,technical,andregulatoryevaluationconductedduringtheduediligencephaserepresenttheasset’s“as-is”condition.However,theownerofanassetmightalsoconsiderevaluatingadditionalopportunitiesderivingfromtheasset’spotential. A feasibility study thus identifies potential scenarios taking into consideration regulatory limits/constraints, improvements allowed by law based on asset class and property type, and safety & healthconsiderations.

Example:Limits/constraintssetby

localregulations

AssetOpportunitiesbyAssetClass•  Urbanzoninglimits/constraints•  Typeofworksallowed•  Typeofworksrequired•  Civilandsystemsworks(ex.safety)required

•  Financialsustainability

Assetclass Permitted Noworkslight

renovationheavy

renovationdemolition&reconstruction

Existing es.Convent V ASIS V X X

Studenthousing V V V X X

Seniorhousing V V V X X

Hospitality V V V X X

Residential V V V X X

Office V V V X X

Commercial V V V X X

Parking X X X X X

TypesofUpgradesAllowedVSrequired

Scenarios

Areyouawareofcurrentmarketpricesforyourassettypeinyourarea?

Areyouawareofmarkettrendsforvariousassetclassesinyourarea?

Realestatemarket–currentcondition&trends

Areyouawareofcurrentmarketpricesforyourassettypeinyourarea?

Areyouawareofmarkettrendsforvariousassetclassesinyourarea?




Des ig n&Permitting

Inves torR elations

Ac tion





Realestatemarket–currentcondition&trends

Currentcondition

Severalmarketfactorshavedirectimpactonthecurrentorpotentialuseoftheassetclassinhand.Astudyofsuchmarketfactors,whethersocio-economicormarketspecificatamacro,area,orlocallevel,arekeyinunderstandingthefeasibilityofallscenariostobeidentified.

ExampleofSocio-economicandRealEstateMarketFactorstobeevaluated

Socio-Economic RealEstate

GrowthDomesticProduct(GDP)andCategories NumberofRealEstateTransactions(saleandlease)

GDPperCapita ValueTransactionsperUnit

PurchasePower RatiobetweenRealEstateMarketandStockMarket

NationalDebt NewMajorDevelopments

SavingsperCapita(DisposableIncome) Sales/LeaseIndex

DisposableIncomeinvestedinRealEstate

DemographicFacts

Trends IndexFluctiation(Variations)

Demand IndexVariationperAssetClass

LevelofAnalysis:Macro,Area,Local

AnalysisType

RealEstateMarket–Socio-economicCriteriaSocio-economic&DemographicCriteriaAnyvariationsorfluctuationsonsocio-economiccriteriawillhaveadirectimpactontherealestatemarket.Asaresult,correlationsbetweensuchcriteriaandtheresultingimpactontherealestatemarketmustbeevaluatedtoidentifycurrentandfuturetrends.

ItalianGDP GDPperCapita PopulationDistribution

ExampleCriteria:

RealEstateMarket–CurrentConditionDependentupontheimpactofsocio-economiccriteria,therealestatemarket,whetheratmacroorlocallevel,mustbeevaluatedtounderstanditskeydynamicswhetherrelatedtovalue,numberoftransactions,averagerentprices,averagesalesprices,commercialgrowthindicators,newdevelopments,services,transportation,andvicinitytopointsofinterest.

Area/ZoneLevel:AverageSales&RentPrices

NumberoftransactionsInthemaincities

RealEstateMarket–Trends&demand

Investmenttrends MacroLevel:RapportoImmobiliare2018,NTN

Propertyreturns

AssetValuation

Doyouknowhowyourpropertycanbevalued?Doyouknowhowtoevaluateanddetermineyourasset’shighestandbestuse?




Des ig n&Permitting

Inves torR elations

Ac tion





AssetValuation

Doyouknowhowyourpropertycanbevalued?Doyouknowhowtoevaluateanddetermineyourasset’shighestandbestuse?

AssetValuation:Methods

ü  ComparablesMethodThe Comparables Appraisal Method expresses the value of an asset based on average rent or sales pricesrecordedonlocalmarkets,takingintoaccountthespecificcharacteristicsoftheasset.Rent or Sales Prices are determined based on comparable transactions by type, location, maintenancecondition,andassetusewithavalueexpressedinaveragevaluepersquaremeterderivingfromactualmarkettransactions.

ü  FutureCashflowMethodTheFutureCashflowMethodexpressesthevalueofanassetbasedonanestimateoffuturecashflowsderivingfromtheasset.Thefuturecashflowapproachisbasedontheassumptionthatarationalbuyerisnotwillingtopayapricehigherthanthecurrentvalueofthebenefitsthattheassetwillbeabletoproduce.Thevaluationiscomposedof a comparisonof two keymarket indicators: averagemarket rent expressed in Eurospermetersquaredandamarketrateofreturn=>valuationassupply-demandintersectVStheoreticalpriceü  CostofConstructionThe Cost of Construction approach consists of determining the value of an asset based on the the cost ofbuildingasimilarasset.Thecostofthebuilding includesthecostof land,constructioncost, lessdepreciationbasedonthebuilding’sage.

AssetValuation:Highest&BestUse

As-isValuationBasedontheresultsofaninitialduediligence,afairmarketvalueisestimatedfortheassetwithoutanyimprovementsconsidered.

MultipleScenarioValuationBasedonaninitialduediligenceandafeasibilitystudy,afairmarketvalueis

estimatedforthepropertyaswellasthehighestandbestusefortheproperty

withimprovements.

Ahighest&bestusevaluationwillinclude:-  Anestimateofassetrepositioning&Costcompliance-  AMarketingandSalesStrategy-  AFinancialanalysis

Highest&BestUse

Valuation

Market Valuation - Cost of Compliance

Valuation

MAX (Scenario Valuation - Cost of Development)

MAX(As Is or Potential Scenario)

Feasibilitystudy

Doyouunderstandtheentirepathtoincreaseyourasset’svalue?




Des ig n&Permitting

Inves torR elations

Ac tion





Feasibilitystudy

Doyouunderstandtheentirepathtoincreaseyourasset’svalue?

AssetValuation:BusinessModelStrategyBusinessModelStrategyBasedoncurrentmarketconditionsandtrends,potentialbusinessmodelscenariosaredevelopedforthehighestandbestusefortheproperty.Dependentuponthescenario,gotomarketstrategieswilldifferinnatureandcost.Asaresult,akeyconsiderationfortheproperty’shighestandbestusewilldependupontheproperty’sabilitytocreatevalue(revenue)whileminimizingitsoverallcoststructure(investmentandoperations).

Go-toMarketChannels:Rentvs.Salevs.Short-termleasing

Rent Sell Short-termLease

AssetValuation:InvestmentCostsInvestmentCostsAbusinessmodelwilldetermineastrategycapableofcreatingvalueforpotentialcustomersandwillresultintheidentificationofcostsrequiredtobringsuchstrategyintoexecution.Initialinvestmentcostsarethusthecostsrequiredtobringtheassetintocompliance(ifnecessary)andthecostsassociatedtorenovateandimprovethepropertyconsistentwiththedevelopmentstrategyidentified.

Example–Propertyrenderingforresidencetransformedintoshort-termleasinguse

AssetValuation:FinancialAnalysis

FinancialAnalysisbasedonMarketDataWithavaluecreationandcoststructureidentified,scenariosarethenevaluatedandstressedwithpossiblevariationsinthemodel.Criteriasuchasincome,costs,investment,taxes,andlegalstructureareanalyzedandevaluatedusingasensitivityanalysis.

Example–TornadoSensitivityAnalysis

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

ValueCreation

Do you know regulatory, technical, andmarketing requirements necessary to implement yourproperty’shighestandbestusestrategy?




Des ig n&Permitting

Inves torR elations

Ac tion





ValueCreation

Do you know regulatory, technical, andmarketing requirements necessary to implement yourproperty’shighestandbestusestrategy?

AssetValueCreation

Consistsofimplementingthestrategiesdevisedforthehighestandbestusescenario.Assetvaluecreationwillthusimplythedevelopmentof:a) technicaldocumentsrequiredtobringtheasset intocomplianceandrepositioningforhighestandbestuse.b)executionandmanagementofconstructionandrenovations.c)setup,placement,andsale/leaseoftheassetinthemarket.

Buyer’sRisks•  UrbanPlanningandZoning•  Limitations•  BuildingPermits•  Time

RiskMitigationStrategiesfortheBuyer•  Pre-developmentdesign•  IssuanceofPermits•  MarketAnalysis

Advantagesfortheowner•  Pro-activeselling/leasingapproach•  Salesorleasingclosingtimesarereduced->LessTime=MoreMoney•  ThecostforriskmitigationactivitiesisLESSTHANthepotentiallosseson

thefinalsellingorleasingprices•  Propertybecomesmoreattractiveintermsofvalueandnumberof

potentialbuyers

Buyer’sRisk-Rewardmodel

Buyer’sReward

Owner’sSellingprice

AssetValueCreation

ü  DevelopmentofTechnicalDocuments:ComplianceBasedontheinitialduediligenceandfeasibilitystudies,anyitemsidentifiedasnon-compliantmustbebroughtintocomplianceaccordingtolocalregulations.Asaresult,severaltechnicaldocumentsmustbepreparedforfurtherimprovementsrequiredtobringtheassetintocompliance(i.e:technicaldrawings,permits)

ü  DevelopmentofTechnicalDocuments:Construction&RenovationsInadditiontomeetingcompliancerequirements,feasibilitystudiesmightresultintheneedofaninvestmentforimprovementsnotlegallybinding.Asaresult,severaltechnicaldocumentsmustbepreparedforplannedconstructionandrenovations.

ü  DevelopmentofTechnicalDocuments:AssetrepositioningTheimplementationoftheassetrepositioningstrategybasedontheidentifiedbusinessplanrequiresthepreparationofabusinessplancomposedofafinancialanalysis,riskanalysis,projectanalysis,pricing&marketingstrategy,legal,andtaxadvisory.

ü  DevelopmentofTechnicalReport:MaintenanceFieldinspectionreportsderivingfromthedetailedphaseofduediligencemightrequireorpointouttheneedforbuildingmaintenance(i.e:conveyorsystems,roofing,machineryandequipment).Asaresult,technicaldocumentsandprocurementmustbepreparedforplannedordinaryorextraordinarymaintenance.

InvestorRelations

Anasset’svaluederivesnotonlyfromitspotentialbutalsofromtheowner’scapabilityofimplementinganappropriatego-tomarketstrategy.Asaresult,theimplementationofgo-tomarketstrategiesrequiresownerstopossessthefollowingcriteria:

ü  Abilitytocommunicatewithallstakeholdersü  Knowledgeofthemarketatamacroandlocallevelü  NetworkandChannelsofCommunicationü  ConstructionandProjectdevelopmentcapabilities.




Des ig n&Permitting

Inves torR elations

Ac tion





Case Study: Convent à Senior Housing

Details*TotalGLA:5.000m2

*Occupants:10!❌  Novisionandmissionpre-establishedfortheproperty❌  Nospaceoptimization❌  NoDueDiligenceorFeasibilityStudycarriedout❌  Noinformationavailableforpotentialbuyerorrenter


DueDiligenceReportü  HighMaintenanceCostsü  IssueswithBuildingPermits,Health&Safety,andSystemsü  CostofCompliancerequired


Assessment ID Action

Compliant NoCost

Non-Compliant CostofComplianceX


FeasibilityStudyReportü  HighestandBestUse:SeniorHousingü  LightRenovationsrequiredandallowedü  PermitsandCertificatesmustberequestedü  Financiallyviable

Assetclass Permitted Noworkslight

renovationheavy

renovationdemolition&reconstruction

Existing es.Convent V ASIS V X X

Studenthousing V V V X X

Seniorhousing V V V X X

Hospitality V V V X X

Residential V V V X X

Office V V V X X

Commercial V V V X X

Parking X X X X X

TypesofUpgradesAllowedVSrequired

Scenarios


ResultsfortheOwnerü  2.500m2toberentedanddevelopedintoSeniorHousing.ü  40%ofthecostofinvestmentisallocatedtocoverforthecostsofcompliance!ü  Thedurationofduediligence,feasibilitystudy,issuanceofpermitsperiodimplied10monthsofrental

lossesfortheowner.ü  Reducedmonthlyrentalforthefirst4yearstocoverforthecostofcomplianceandopportunitycosts.

X

Senior Housing 2.500 m2

Convent 2.500 m2

PropertyRental

DueDiligence

CertificateofCompliance

DueDiligence

ChoiceofStrategy

FeasibilityStudy StrategyImplementation

OptimalIntegratedPath

PropertyRental

DueDiligence

CertificateofCompliance

DueDiligence

ChoiceofStrategy

FeasibilityStudy

ActualTimeline

Renter’sInterest

Renter’sInterest

NoDueDiligenceorFeasibilityStudy StrategyImplementation

10monthsoflostrental+reducedfuturemonthlyrent

TimelineofEvents:ConventàSeniorHousing

KeyTakeaways

DueDiligenceü  Complianceisanobligation,notanoption.ü  Aproactiveapproachisbeneficialincreatingvaluetoday.ü  Knowledgeofyourasset’sconditioniskeyinunderstandingitspotential.

Feasibilityü  Withoutduediligence,theassetwillremainstagnant:nopotentialscenarioscanbeenvisionedordeveloped.ü  Yourassetispartofanevolvingecosystem:knowyourstakeholders,knowyourmarket,knowyouroptions.

Valuationü  Valuationisnotanexactscience;learnthekeycriteriathatwillhaveadirectimpactonyourasset.ü  HighestandBestusevaluationdependsonidentifyingtheequilibriumbetweenmarketsupplyanddemand.ü  Investmentsarerisksthatyieldhigherrewards.

ValueCreationü  Knowinghowtoalignyourtangibles(asset)withyourintangibles(stakeholdersandenvironment)willallow

youtocreatehighervalue.ü  Apro-activeapproachthroughriskmitigationstrategieswillyieldahighermarketvaluation,highernumber

ofpotentialbuyers,andlowernumberofdifficultiesinatransaction.

Thank You and

beprepared…today!