A lesson in due diligence

As you may have read in our blog on Due Diligence (DD). This is a critical step prior to close, and will either green light a project or provide an argument to kill it.

We recently had an opportunity to partner on what looked like a strong value-add deal. On paper it checked all the boxes we look for, but the DD process uncovered too many areas of concerns and the management team decided to kill the contract.

I wanted to share the findings because with so much time and effort that goes into every deal, it would be easy to ignore the warning signs and move ahead anyway. I’m happy to know that the sponsors and I agree with being conservative, thorough, and keeping our investors at the forefront of our minds as we make key decisions.

The lead sponsors initially chose to conduct due diligence on this property for the following reasons:

  1. The deal had a lot of potential upside, including a 25% rent bump

  2. Vacancy rates in the area are very low, and no new inventory is being built

  3. The Broker labelled the property as being on the north side of the city ( generally more desirable in that area)

  4. There is a lot of economic activity in the area, including headcount expansion for multiple large companies in the area

Pre due-diligence Concerns:

  1. The population has been essentially, or slightly down, for a decade, hovering around 154,000

We chose not to do the deal because:

  1. There are significant structural and drainage issues that were not disclosed

  2. There may also be mold that was not properly remediated

  3. A partial lease audit found inconsistencies and poor book keeping

  4. There are some potential electrical issues where aluminum wiring was improperly remediated

  5. The property is located just on the border between the more desirable north and less desirable east side