Why Use a Virtual Data Room for Commercial Real Estate Due Diligence
Jul 28, 2021
You wouldn’t buy a car or house without properly examining your purchase. So why would you purchase commercial real estate without doing your due diligence? Perhaps because the task is onerous, and there is so much involved. Simplify the task by using a tool like a virtual data room.
What is commercial real estate?
Commercial real estate is one of two primary types of real estate (the other being residential).
According to Investopedia:
“Commercial real estate (CRE) is property that is used exclusively for business-related purposes or to provide a workspace.”
Some examples of commercial real estate include:
- Office space
- Health care facilities
If you rent out residential space for profit, it’s considered commercial real estate, too.
Essentially, if it is involved in commerce, then it is commercial.
What solutions does the virtual data room offer for real estate firms?
To start with, let’s first define what a real estate data room is.
Data room software, or a virtual data room (VDR), is software that allows users to store and share sensitive information online in a secure place.
To be considered a VDR, a product must:
- Ensure secure storage and distribution of content and data
- Provide basic security measures (think encryption, two-factor authentication, watermarks, and single sign-on controls)
- Customize, verify, track, and enforce permissions
A good VDR, however, will come with more than just the basics.
Some of the extra features available in a virtual data room include:
- The ability to carry out real estate due diligence
- Real-time activity reports to keep you in the loop
- Live chat for support should a problem arise
- Audit logs for security and compliance
- Zoom integration for real-time facility tours
- Drag-n-drop document collection for ease of use
- Large storage volume and support of multiple file formats, allowing to upload real estate tours to a data room
- Optical character recognition for automating data extraction from a scanned document or image file
- E-Signatures so you can electronically sign documents online securely within the data room
- The ability to share information with multiple groups at the same time while keeping those parties unaware of each other
Benefits of a data room for real estate due diligence
You use a virtual data room for real estate due diligence for the same reason you use a VDR for anything else.
First off, it’s convenient. In particular, it allows you to:
- manage all of your projects in one place
- share documents
- conduct due diligence
- store all of your data securely
Submit requests, send secure messages, and receive information in one place – thus eliminating the need for email, Excel, and anything else that would require extra attention to track and keep in order.
Invite third parties in and let them view, share, and even edit files securely — all in a space you control.
Virtual data room providers
Many virtual data room providers have recognized the applicability of a virtual data room for real estate.
Now they offer solutions tailored specifically to real estate firms and to all the people involved in the process from start to finish.
Who are these people?
The professionals using virtual data rooms for real estate include:
- Investors – to track property and to communicate with others
- Brokers – to manage multiple projects
- Auditors – all the documents are in one place
- Customers – this is the place they make their decisions more quickly and with greater certainty
- Real estate professionals – for property management
- Lawyers – for access to documents and to track progress
Who are the virtual data providers?
Search for a VDR for real estate, and you will come across:
iDeals data room is known for facilitating communication between buyers and sellers and for having security you can put your trust in. The provider frequently occupies the top spot in rankings.
DealRoom provides easy-to-use features such as drag-n-drop and the ability to integrate with Microsoft Office and Salesforce make it a popular choice with some big-name clients.
Donnelley Venue Data Room is also known for its security and easy-to-use features and is a favorite among financial institutions.
Drooms is marketed as the virtual data room for real estate due diligence. It boasts advanced AI, data storage in Germany and Switzerland, and superior technical support 24/7.
Datasite (formerly Merrill) has been in business since the 60s and brings a wealth of expertise to accompany swift growth. A pioneer in VDRs, DataSite is known for original and effective solutions.
Why use a virtual data room for due diligence on commercial real estate?
- Easy project management. Whether you’re appraising, advising, or facilitating a sale or purchase, you need to be organized. A virtual data room helps keep files and documents in order.
- Smooth document upload and access. Uploading is easy when it’s done in one place, especially with the bulk upload function.
- Convenient collaboration on files. Share information with property managers or partners, interact with investors, and exchange information with board members.
- Simplified access management. Manage document access to avoid data leakage. Grant access to specific documents and revoke access if need be.
How to prepare a VDR for commercial real estate due diligence?
Before you upload the documents to the VDR, there are a few steps:
- Ensure the information provided is correct and of appropriate quality to avoid unnecessary delays or incorrect conclusions.
- Identify buyer type. Are they a strategic buyer or a financial investor? The answer will determine the type of information you provide in the data room. It needs to be adequate for their needs, but it shouldn’t be overabundant, nor should it lack necessary files.
- Compile a document list. Now that you know what information to provide, compile a due diligence list so that nothing gets lost. Remember that providing too much information may lead to too many questions, so try to strike a balance when it comes to the quantity of data you want to share.
- Identify folder structure. If you just dump the information in a pile, it will be of no use to anyone. Consider a data room folder structure, also known as data room index, prior to starting any upload. Typical arrangement of data involves creating large folders for topics that a buyer will need for performing investigations (HR, finances, legal, etc.) and a specific topic(s) of each particular area. But you can modify the data arrangement structure to your needs and liking.
- Clean, or blackline, the information. Prior to sharing, strikeout sensitive information and safeguard private information like names and other details, especially if they are subject to an NDA. This will help to weigh less on your nerves and reduce the chances of legal action or monetary damages from litigation.
Aug 16, 2021A Guide to Choosing an Investment Banking Data Room