Agree: … Speed of Due Dilligence & Risk for Investors

This article makes sense to me …

Speed of Due Diligence & Risk for Investors

Apr 6, 2015 – Richard West … this is from …

IVI / CBRE currently sees an unprecedented trend in how fast due diligence needs to be performed. … This is especially true in core gateway markets such as New York, Los Angeles, San Francisco, Seattle & Chicago to some extent.

There is an increased appetite by investors to deploy capital into real estate that’s putting pressure on them to do deals more quickly.

This increasing “need for speed” creates a greater chance of investors being burned on real estate deals, as when times are good in the industry investors are sometimes blind to past failings.

There is no doubt investors have a decreasingly short period to make investments, as right now these gateway markets are hot & more & more equity is available for deployment, causing prices to rise as demand outstrips supply.

The fear is that in order to meet expected returns, investors will be required to either move up the risk spectrum or to diverge from their usual investment strategy while on the hunt for attractive assets.

Some investors may also face additional risk by moving away from their core property strengths & take on assets they are less experienced in managing.

In past years it was not uncommon for an investor to have anywhere between 30 to 45 days to complete their due diligence.

However, we are seeing timelines as short as 5 to 7 days for a buyer to either complete their due diligence or waive contingencies.

We have heard of several cases where our client released hundreds of thousands of dollars in order for the seller to allow them the opportunity to sign the purchase and sale agreement.

The drive for these expedited timelines & deal constraints is simply the competitive nature of the market for these core cities & the class-B+ to class-A quality assets within these markets.

We’re seeing this trend in assets of varying sizes. As the number of potential buyers increases, so does the market demand for fast “go hard” decisions.

While the trend is most evident on larger assets in the $100-million-plus range, it is becoming increasingly common on $10 million to $100 million properties.

For these properties, it is extremely difficult to get exclusive due diligence periods without leaving some “walk away” money on the table.

There’s an obvious, inherent risk with these deal structures, but aligned with a qualified & experienced consulting team a client can often offset this risk.

We are often asked, “How quickly can you prepare a report for my acquisition?”

This approach is flawed from the outset.

Only after a clients’ risk profile is assessed can an appropriate due diligence scope of work & schedule be established, provided a report is actually even required.

The purchaser’s familiarity with an asset type and market help establish the baseline for review.

Flexibility in reporting & communicating findings is essential — often enhanced post-site visit debriefings, detailed conference calls with the team, & preparation of complete summaries with opinions of probable costs may be all that is needed to give meaningful guidance to clients.

Qualified consultants respond to this need for increased speed in due diligence with condensed deliverables, prepared by skilled architects and engineers.

The focus is a “get to the point,” numbers-driven analysis tailored to a client’s needs, which provides critical data they need to make the best business decision possible.

Creative report delivery strategies must be explored, but nothing can replace the trained eye of a highly experienced due diligence advisor supported by a network of seasoned experts.

Having a well-rounded generalist who is a registered architect or professional engineer lead the process is invaluable, especially when specialists are added to the team to review specific building systems & components.

And when there is time pressure surrounding the review of real estate, this makes all of the difference.

Richard West is senior managing director of CBRE valuation & advisory services;  Robert Occhiogrossi is managing director of IVI Assessment Services, a CBRE company.


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