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Tuesday 23 August 2016

Standardisation is key to the efficient management of real estate transactions - Real Estate Committee - August 2016

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Standardisation is key to the efficient management of real estate transactions

Jan Hoffmeister, Drooms

Frankfurtj.hoffmeister@drooms.com

 

One of the world’s most important growth markets is commercial property, and the need for compliance and process efficiency within this area is steadily increasing. This is due to an ever-changing and volatile market environment, and the growing demands that regulators and investors make of real estate companies, banks, funders and insurers. The inefficiency of the existing processes, together with increased transaction volumes, adds impetus to the pressure to improve the due diligence processes.

The need for efficiency in the real estate market

To ensure a smooth market structure through standardisationand improved transparency, the German gif association (German Society of Property Researchers)has issued a recommendation for the standardisation of commercial real estate data rooms. This recommendation is geared towards all real estate vendors in Germany, and hasspecific requirements relating to the structure of data rooms for real estate transactions.

Vendors will receive an index template that is suitable for both the potential buyer’s examination of the purchase, and for the contractual documentation between the parties. Furthermore, the recommendation covers other important aspects of commercial real estate, such as: the technical and legal requirements of a data room; the correct naming of documents; update management and security.

Standardised real estate data rooms

The centrepiece of the recommendation is a standardised index. It is not overly extensive, but it does contain all of the essential elements for real estate transactions. Although the gif is a German association, the index it recommends will also work on an international level.

The index would be the core element of a data room because it structures the whole content of a transaction, and would fulfil the requirements of due diligence for average real estate. It is possible to extend the index, but it should not be shortened.
The relevance of each of the index's components will depend on the specifics of the assets involved in the transaction. The index aims to facilitate the separation of the property, the company and financing. Items 2 and 3 will be irrelevant for some asset deals so can therefore be left out. However, if items 2 and 3 are relevant then the recommendation provides a structure which should be maintained.

The main points of the index are:

 

1

Property-related documentation

1.1

Introduction

1.2

Site

1.3

Ownership

1.4

Construction planning law

1.5

Building regulations law

1.6

Building (technical management)

1.7

Tenancies

1.8

Management (commercial)

1.9

Taxation

1.10

Legal disputes

1.11

Object-related contracts

1.12

Additional information for special purpose properties

1.13

Other documents / contracts / agreements

2

Legal entity documentation

2.1

Legal entity 

2.2

Articles of association

2.3

Shareholders' resolutions

2.4

Management board

2.5

Entity related contracts

2.6

Land purchasing contract

2.7

Financial information

2.8

HR

2.9

Joint Ventures

3

Financing

 

The index provides the contracting parties with a satisfactory and reliable basis to establish a well-structured data room. It is the first time definitive guidelines to regulate the standard structure and required content of a data room have been agreed. This is despite the fact that data rooms are generally very similar for all commercial real estate transactions. One of the consequences of the lack of standardisation has been unnecessarily long waiting times for the integration of data during the progression of a deal. These delays can make transaction costs soar.

The significance of standardisation, which facilitates efficient due diligence processes and therefore helps keep down the overall transaction cost, should not be underestimated. All parties involved in transactions can benefit from standardisation by reduced costs and saved time. Therefore, the recommendation of the gif is to establish a new standard for real estate transactions. A comprehensive implementation will ensure comparable due diligence processes, which will make life easier for the buyer, vendors and portfolio manager.

Experts from Centrum, Clifford Chance, Drooms, GE, JLL, Nexus and UBS were involved in the development of the recommended data room standards. These experts were all able to provide a different perspective on the topic, and they each offered extensive experience in the sale and purchase of commercial property.
 

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