Expert Advice: All Due Diligence is Not Equal

By EBI’s David Stewart

Stewart

The due diligence process is a necessary step that can be worth every dollar and minute invested into making sure a property investment won’t cause headaches later. Consider a recent EBI assignment involving a multifamily property owner selling a joint venture partnership interest in a 77-unit property in the greater San Francisco Bay area.

The problem was that originally the seller purchased an ASTM-level report. The purpose of that report was to establish the current condition of property and recommend immediate repairs and replacement reserves, as well as help establish the valuation of a JV partner acquisition.

Upon receipt of the initial draft report, the client requested modifications. Those included asking that costs be more reflective of actual ownership and management. While this was at an additional cost, report content and items identified in this level of reporting are not as comprehensive as an Acquisition-level assessment.

The JV sale transaction proceeded. The new joint venture partner was now expending significant CapEx funds not associated with work represented in the report. That caused the client to become concerned about fund disbursements, the accuracy of work estimates, and the value of work underway and completed. That led to a request for additional third-party review and confirmation of work being completed, involving additional time and cost.

EBI’s solution was to conduct a more extensive assessment of the property. If an Acquisition Property Condition Report (APCR) had been purchased initially, the scope would have been customized to address the full spectrum of the client’s concerns, and included costs more reflective of ownership. Valuations would have changed and CapEx would be more reflective of actual work necessary and recommended.

Those are some of the key reasons EBI recommends working with a consultant to determine the appropriate level of investigation and/or reporting. In certain cases, a more in-depth and customizable report, like an APCR, will provide clients more of the information they need.

One of the benefits of APCRs is they provide a more in-depth dive into the condition of a property. For those in the midst of an acquisition or other more complex property transactions, or for those who need more information than a standard ASTM-level report provides, the customization and additional insights provided by an APCR can be invaluable.

For comments, questions or concerns, please contact Dennis Kaiser