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This report intends to describe the Mid-construction purchasing of The Grand Venezia Shopping Centre project in Greater Noida, India. The arrangement involves the previous Client who is going to sell the project in the middle of the construction phase to another company - ‘DesCon' that also has similar interest and has experience in the same industry. DesCon intends to purchase the project in current condition where the construction is predicted to be finished in six months. In order to complete the agreement and before finalizing the transaction, DesCon will perform the Due Diligence assessment of the project including detailing for the basis of a purchase scope of work documentation. The client‘s needs brief done in the past will be assessed and recommendations will be given to resolve any shortfalls.
2.0 Project Status
The current project owner (called ‘Principal -A') is identified as private developer having experienced in retail industry from past 20 years. The Design brief prepared for the Principal - A describes the client's needs and opportunities to build a retail shopping centre in Greater Noida. The client's main aim was to create a regional landmark by constructing theme based mall which will be the centre of family entertainment and leisure treat in the surrounding area. The process taken includes; the data analyses for chosen location and a comprehensive environmental scan. It covers the factors like physical, emotional and financial values to be applied, in relation to sustainable issue, risk and project management performance. Principal - A recognized the complexity of the project and confirmed to deliver the project through a traditional method.
Principal - A changed his mind and wanted to liquidate the project by selling in the middle of the construction process. A company DesCon intends to take over the whole project in its current condition.
2.2 Current progress
The current progress of the project can be summarised as follows:
- According to initial design, the construction is predicted to be complete in 6 months.
- Main structures (concrete frame; column, beam, slab) are completed.
- Physical progress and resources used are around 60%.
- External wall construction, Interior and exterior finishing and façade.
- Building services (Mechanical, Electrical, Fire)
- Landscaping, Car Parking, garden, fence and gate.
- Plumbing, storm water treatment, sewerage.
- Handover retail area to tenants for fit-out.
3.0 Further Feasibility Study
DesCon commenced to conduct another private feasibility study. At this stage a study yields great insights into the strategy which must be adopted by the new client, project manager and his team. The data from the previous Client's Need Brief is referred for this study. Further feasibility study gives a clear data regarding the current image of the whole project, identifies the problems and opportunities, determining the objectives, describing the situations and defining successful outcomes. This study is used to support the decision making process based on the project viability.
The sales potential for most retail venues is a function of the economic and demographic characteristics of the area in which it is located.
The feasibility study includes
3.1 Location of the site
- Location is the most important ingredient for any business that relies on customers, and is typically the prime consideration in a customer's store choice.
- The site for the proposed shopping centre is located at Greater Noida, India. The site area is approximately 150,000 sq.ft. (14,000 sq.m)
- The location of the centre is the most prime place in Greater Noida. It is well connected with local transport from Delhi and other adjoining cities as well.
- There are many educational institutions, offices and residential sectors in its vicinity.
- No major malls exist in this location and this theme based mall would be one of the biggest upcoming shopping centres in Greater Noida.
(Grand Venezia, 2009)
3.2 Demographic composition
Greater Noida is a known planned township situated in proximity to the India‘s Capital city, Delhi. All the development in the areas of Industry, Commerce and Trade have led NOIDA to be a model city. It is a major revenue earner for the government through taxes. The NOIDA model is now being replicated across various cities, with a proactive development agency working to achieve high growth rates for business, industry and commercial ventures. (Refer Appendix -1)
3.3 Target audience
- ‘Consumer pull', however seems to be the most important driving factor behind the sustenance of the industry
- The mall coming up aims to meet the customer's expectations, lifestyle. It should cater to the needs of the community.
- This mall is expected to be first of its kind in India - A theme based mall with all shopping plus entertainment facilities which is likely to attract many localities and tourists.
- Indian consumers are usually family- driven entities. Shopping, entertainment and eating out are family events. Hence, a marketer has to address family sensibilities more rigorously to woo the customers.
- This shopping centre will lend an ideal shopping experience with an amalgamation of product, service and entertainment all under a common roof. (Grand Venezia, 2009)
- "Apart from the further feasibility study, more data shall also be gathered including any related business issues, operation, old partnership and other key relationship, product and finance or accounting issue" (Frankel 2005).
3.4 Investment study
This study includes:
- An Analyst identifies the fundamentals factors initially and then critical factors.
- The entire cost of the project's completion must be included in the analyst's estimate, including all three major categories- land, hard costs, and soft costs - each with an appropriate contingency factor added in.
- Land costs are fairly straightforward.
- Hard costs will base on architect's preliminary design.
- Soft costs include development costs, architecture and engineering, legal fees, leasing commissions and cost of preopening marketing activities, loan administration fees etc.
- Estimated net Operating Income.
- The most important for the analyst is to estimate projected rents from tenants. The analyst should obtain the leasing team's thoughts and review their back up.
- Value Engineering- the purpose of value engineering is to optimize resources to achieve the greatest value for the money being spent.
(White J. & Gray K. 1996, p. 222, 223,224, 225)
As mentioned in the client needs brief, the sources of revenue and operating costs will remain the same.
4.0 Project management performance requirement
The new client DesCon, in this project is well experienced in the construction industry and thus is fully aware of the risks that could be encountered. For this reason a project management type contract will be used "which is non adversarial, uniting all the project members" (Uher & Davenport, 2009). The client's foray into the construction market, success in this field before has made the client understand that taking risk is necessary to achieve high returns. This makes the client more risk seeking naturally and has awareness of the dangers in the industry. However the client is not afraid to take risk if advised by the carefully appointed project manager and his team.
The stakeholders in this project need to have a clear vision of the shared objectives and the risks to these objectives. Then all need to share in the commitment to managing those risks. This will require, on the part of the project manager, ongoing communication and regular evaluation and group meetings throughout the life of the project. The main objectives for the project manager are:
- Deliver the project on time, expected quality and to budget.
- Ongoing profitability for the client in the long term
- A Risk Management Plan for all stakeholders
- Enhance the reputation of Project Management Company
- Achieve a level of environmental standards and a green star building
- Provide a safe working environment
The client would enter into a contractual relationship with the head contractor. The proposed pricing strategy would be a lump sum incorporating a schedule of rates type of contract in order to price any variations that may occur during the construction (Uher& Davenport 2009). A typical general condition of contract would be concluded with the head contractor. Separate contract agreements with the other consultants will be entered into for professional services rendered and a contract of agency with the independent project manager in this case. (Refer appendix - 2)
5.0 Due diligence assessment:
DesCon will be conducting a Due diligence to exercise and evaluate the risks affecting the business transaction. The process takes place after the two parties (DesCon and Principal -A) have reached a preliminary understanding after the business offer and the commercial aspect is proven to be feasible. This activity then will lead to binding contract signed by both Principals. Before conducting due diligence, a preliminary step is taken, to discuss the project objectives and needs.
5.1 Preliminary Due diligence
In this stage, DesCon has set their targets and objectives which will guide the entire team throughout the project. The objectives of the incoming due diligence is to verify that the business is essentially profitable as what it seems to be and to verify the investment which is going to be made, complies with them.
5.2 Conducting Due Diligence
In order to maximize the profit and avoid the loss in this transaction, DesCon will conduct several reviews and appraisals. The examination shall include, executing further feasibility study, estimating the current project worth and reviews every related document to get a comprehend understanding regarding project life cycle, characteristic of previous delivery method, significant problems, assumptions and constraints. Some of these required materials can be gained from previous Client Needs Brief, but in regards of any shortfall and its weaknesses, the examination will not be limited in one single document only. However, any judgment which will be suggested shall base on accurate, objective and unbiased data taken from latest observation and analysis.
Due diligence conducted for acquisition of the mentioned property shall be classified into six major categories:
5.2.1Legal due diligence:
DesCon shall be verifying all contractual aspect of the shopping centre and contractual arrangements with the current financial and operational details of the property investment. The legal documentation shall be reviewed by qualified legal professionals. The documents need to be reviewed are:
Contracts between various stakeholders.
5.2.2Financial Due Diligence:
This shall be one of the most important investigations which may represent the contracted and forecast estimation of revenue and expenses that underpins the investment cycle. It includes:
5.2.3Physical Due diligence:
As stated earlier, the construction is mid way, therefore physical due diligence of the structure shall be carried out in relation of building structure, façade, foundations, common area interiors, tenant areas and building and net let table area surveys. Property Condition Assessment can be as limited or as comprehensive as required and will typically include assessment of structure, building envelope, interior finishes, Electrical, plumbing, landscaping.
5.2.4Building services due diligence
The project demands great services application into various aspects and few of them still need to be incorporated, therefore qualified professionals shall be appointed to conduct inspections of the present and applied services within the building so that unexpected expenses can be prevented in later years. It shall be undertaken with the assistance of a mechanical or services engineer and cover the condition and life cycle of lifts, air-conditioning, electrical services, hydraulics, building maintenance unit, fire services and security. A full examination of service records and compliance to building regulations shall be undertaken. Building services can be one of the hidden costs that are overlooked or not thoroughly investigated during the due diligence period.
5.2.5Environmental due diligence
There shouldn't be much problem by the environmental issues as all the approvals and permissions have been taken at the initial stage of the project life cycle, but it shall be important to have a look on environmental problems and impacts as they have become increasingly prominent throughout the industry and have a significant profile in the media.
5.2.6Regulatory due diligence
All the basic approvals for construction and land acquisition have been done. In order to avoid the delay in a construction, investigation and assessment of risks of each component of a property, should be done and should be checked with the Greater Noida and other relevant statutory regulatory bodies required to be met as owners of a building. The level of compliance with the various regulations which govern property ownership shall be a key deliverable during the investigation. All the required approvals should be checked in terms of development application, environmental approvals, building completion stages certificates.
5.3 Capital expenditure forecast
A capital expenditure forecast shall be constructed to determine the long term capital needed to invest for improvements and maintenance for the shopping centre. (Refer Appendix 3a)
5.4 Investment cash flow
On completion of the capital expenditure forecast the investment cash flow for a project shall be prepared. (Refer Appendix 3b)
5.5 Capitalisation valuation
The final decision for purchasing the asset shall be taken after the above mentioned investigations are done. The capitalisation rate used shall be in line with the current market conditions and DesCon investment criteria and objectives.
5.6 Risk Factor:
A number of risks need to be addressed in undertaking due diligence on the shopping centre prior to purchase:
Each of the above mentioned risks should be identified and possibly quantified keeping the appropriate financial contingencies.
6.0 Shortfalls of Design Brief of Client - A
According to due diligent requirement and the corresponding process, DesCon has to perform the acquisition based on normal and common adopted procedure of due diligence. In regards that many documents are needed to be evaluated, it can be sure that conducting the due diligence solely based on Principal-A Client Needs Brief Document is not adequate.
Many shortfalls are found during the process which can be listed herein:
- Inadequate data collection regarding the Greater Noida environmental condition, demographic data, economical statistic, future plan and strategic decision. These raw data cannot be applied to predict future business behaviour.
- Inadequate data process and analysis in regards of financial matters, financing and return of investment calculation.
- Data in design brief is more restricted and creates limitations for design process.
- Project delivery method is not explained in detail.
- Data regarding Legal issues and statutory bodies is insufficient.
- Market analysis is missing in the old design brief.
7.0 Recommendations to resolve the shortfalls
In order to resolve the shortfalls, DesCon has been pro-active to complete the missing data or shortfall occurred. Inadequacy data of environmental scan, financial calculation and client requirement are substituted by new data which are collected by DesCon and its key stakeholder. DesCon conducted several research and feasibility study about site environment.
8.0 Purchase scope of works
Purchase scope of works documents is prepared by DesCon to understand exactly what to expect during the course of the project. It can be identified in following steps.
- DesCon's main objective is to make this project profitable. This can be achieved by maintaining a strict cost and time budget and by creating a building that fills the needs of shopping centre in Greater Noida.
- The second most important goal is that to achieve the necessary financing for the project. It is essential that a reliable financier is found that is willing to take some risk on the project and will not try to affect how the project is operated.
- DesCon need to choose experienced project team. Especially since DesCon has experience in this field, it is absolutely crucial that DesCon surrounds itself with the right people.
- The fourth objective of DesCon, as it pursues this project, is to construct a building suitable for the purpose that was outlined at the beginning of the project. Also, the quality level must be the same as was decided in the conceptual stage. DesCon has a vision for the role and purpose this building will serve.
- The final important objective is the need to see environmental and safety standards maintained. Failures in both of these areas could result in lost time, lost money, fines, industrial disputes and a loss in the reputation of the owner and the project. It is then necessary to take steps to maintain high standards with respect to both safety and the environment. This involves creating policies and implementing training programs.
Deliverables in this transaction can be listed as follows:
- Handover an under construction 4 storied shopping centre premises, including acquisition of the land, purchased materials, and any other resources related to the Retail Shopping Centre project that previously own by Principal-A.
- Completion of External wall construction, Interior and exterior finishing and façade.
- Completion of Building services (Mechanical, Electrical, Fire) and external works
- Commissioning of Retail shopping centre.
- Handover retail area to tenants for fit-out.
8.3 The plan
DesCon will follow the Systematic plan to achieve the deliverables:
- Review the revised project design brief.
- Firm up design requirements as per new design brief.
- Implant new policies and procedures
- Plan the entire program. Make a comprehensive and detail planning and scheduling. It should include the activities, responsible key personnel, target and target measurement criteria, develop the delivery strategy and also alternatives.
- Describing the desired extent of due diligence.
Identify future goal and expectations and specific targets regarding the acquisition.
Regarding this project, DesCon has planned to continue the construction and finish and operate the retail center. DesCon also plans to make a little disdain change to adjust the old design with DesCon brand image and trade mark.
Handover contracts and any other document that relates to this project. The documents are and not limited to:
- Contract: Principal-A - Project Manager
- Contract: Principal-A - Main Contractor
- Contract: Principal-A - Materials Suppliers
- Contract :Principal-A - Labour, Labour supplier,
- Handover includes any other agreement from or between Principal-A and Local Authority, Local Communities, Environmental assessment Authority.
- Handing over of project logs and reports, period basis progress achievement reports, Project specification, drawings, tender document, testing report, completion certificate, NCR, notice of commencement work and any other project management and quality control and assurance documents.
- Review and Inspection of Principal-A's company management document related to shopping centre, share holder and financial reports, balance sheet, assets and liabilities.
8.4 Resource needs
DesCon has identified required resources:
- Key Personnel, that consists of a Project Manager, Company Director and other management and board of commission personnel.
- A Key Purchasing Team. This team will be staffed by special filed expertise personnel to review and examine the feasibility in terms of financial, by laws, engineering, construction, human resources, and quantity surveyor.
- Project to be funded with appropriate finance plan.
- Administration, including infrastructure (office, space), staff, labour, administrator etc.
8.5 Cost and payment plan
- After quite a lot of negotiations, Principal-A and DesCon agree that the Payment will be made upon completion of all the due diligence process. Payment will be done in 2 phases. Phase 1 to be commenced in 7 days upon contract signing with the 75% of total agreed price while the remaining payment to be made in 30 days after first payment.
- DesCon has decided to go ahead with payment plans decided by Principal - A.
- Spaces at the retail centre will be offered as an undisputed advantage in terms of high returns on investment. The choice of Leasing, Renting or Ownership will be given to the tenants in the form of:Down payment plan, Time linked plan, Construction linked plan.
Due Diligence is a critical part of the acquisition process. The thorough investigation of each of the key issues in this paper enables a purchaser to identify the risks associated with purchasing a particular and quantify the mitigation of those risks. Once risks have been identified and quantified a purchaser is able to make an informed commercial decision on the viability of the asset as an investment.
If a potential purchaser believes that they are able to provide better management and reduce outgoings in the building then this will result in additional income on an ongoing basis.
- McKeever, JR., Griffin, NM, Spink, FH, 1977, Shopping centre development handbook, Urban Land Institute, Washington DC.
- Uher T.E., & Davenport, P. 2009. Fundamentals of Building contract Management. Sydney: UNSW press.
- Uher T.E., & Loosemore, M. 2004. Essentials of Construction Project Management. Sydney: UNSW press
- White J. & Gray K. 1996, Shopping Centres and Other Retail Properties, Canada, John Wiley
- Retail scenario in India. 2005. Retrieved from Kiranization of indian malls:The snow white and the seven dwarfs effect: http://www.indianjournals.com/glogift2k6/glogift2k6-1-1/theme_2/Article%204.htm
- Grand Venesia, 2009, accessed on September 2009, <http://www.grandvenezia.co.in/shopping- mall.html>
- Greater Noida Authority, Population and Landuse, 5th October 2009 <http://www.greaternoidaauthority.in/poplanduse>
- Kordamentha research unit, Property Investment Due Diligence and Risk Management, publication 502, June 2005 (8th October 2009)