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Fundamentals of a Successful Real Estate Transaction

Fundamentals of a Successful Real Estate Transaction

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A sound investment requires an understanding of all the risks involved in the transaction. The main objective of real estate financial due diligence is to thoroughly inspect the fundamentals of the property, financing, seller and compliance obligations to be able to reduce and mitigate financial uncertainties.

Whereas the pricing of transactions is mostly driven by the capitalized NOI approach, further price adjustments have been common in the market in cases where the acquisition target is a special purpose vehicle or other company owning the properties.

Such adjustments are specific to each and every transaction and are typically triggered by the key findings of financial due diligence processes carried out by third-party advisors on behalf of the purchaser. Financial due diligence contributes to a deeper understanding of the transaction perimeter and helps identify potential issues which may not be in line with market standards. As a result, in addition to price adjustment implications, these analyses often highlight matters which need to be addressed in the reps & warranties section of SPAs or regulated in indemnification clauses.

Verifying NOI figures and reconciliation with actual rent roll data are amongst the top priorities of the due diligence process. Collecting and summarizing historic datasets for a 3-5 year period is beneficial for recognizing potential trends, assessing the time required to find new tenants in case expiring leases are not renewed and to get a general overview of the development of NOI over the past years. In-depth analysis also contributes to the elimination of one-off effects and the calculation of a long-term stabilized NOI.

Financial due diligence also targets the quantification of potential service charge leakages or, in some cases, the verification of profit margins applied on service charges. It also assists in calculating the effect of specific contractual terms which may be effective for certain tenants, such as rent-free or discount periods, in quantifying profits or losses on fit-outs or in assessing structural vacancy rates.

Analysing the financing structure of the target is of utmost importance as it contributes to the assessment of related risks and may help identify topics that need to be addressed. Key conditions, such as the currency of related loan facilities and bearing interest at a floating or fixed rate, may all be critical from the purchaser’s perspective when considering a potential transaction.

Overall, there are numerous aspects of real estate transactions which require detailed financial due diligence in order to be able to properly address the specific attributes of the asset or entity subject to the envisaged transaction.

By Aron Kovaloczy, Managing Director, DLA Piper

Hungary Knowledge Partner

Nagy és Trócsányi was founded in 1991, turned into limited professional partnership (in Hungarian: ügyvédi iroda) in 1992, with the aim of offering sophisticated legal services. The firm continues to seek excellence in a comprehensive and modern practice, which spans international commercial and business law. 

The firm’s lawyers provide clients with advice and representation in an active, thoughtful and ethical manner, with a real understanding of clients‘ business needs and the markets in which they operate.

The firm is one of the largest home-grown independent law firms in Hungary. Currently Nagy és Trócsányi has 26 lawyers out of which there are 8 active partners. All partners are equity partners.

Nagy és Trócsányi is a legal entity and registered with the Budapest Bar Association. All lawyers of the Budapest office are either members of, or registered as clerks with, the Budapest Bar Association. Several of the firm’s lawyers are admitted attorneys or registered as legal consultants in New York.

The firm advises a broad range of clients, including numerous multinational corporations. 

Our activity focuses on the following practice areas: M&A, company law, litigation and dispute resolution, real estate law, banking and finance, project financing, insolvency and restructuring, venture capital investment, taxation, competition, utilities, energy, media and telecommunication.

Nagy és Trócsányi is the exclusive member firm in Hungary for Lex Mundi – the world’s leading network of independent law firms with in-depth experience in 100+countries worldwide.

The firm advises a broad range of clients, including numerous multinational corporations. Among our key clients are: OTP Bank, Sberbank, Erste Bank, Scania, KS ORKA, Mannvit, DAF Trucks, Booking.com, Museum of Fine Arts of Budapest, Hungarian Post Pte Ltd, Hiventures, Strabag, CPI Hungary, Givaudan, Marks & Spencer, CBA.

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