Due Diligence Reports

[Pope Lake]

Hi BP! How do you pay for and time the various due diligence reports that need to be completed during the due diligence period of an apartment building being under contract? 

I know that several DD reports have to be done during the DD period (ex: financial document audit, PCA, ESA) but is there any sequence in which these are conducted? For example, if an ESA is done and it finds substantial environmental contamination on the grounds, then it might not make sense to do the deal. But what if you've already paid for several other DD reports before finding this out? Are these sunk costs at this point? 

Furthermore, I'm curious how these costs are paid for - whether out of the capital account, your own pocket, etc. 

Thank you! 

[Greg Scott]

So, if you don't have enough money to pay for the due diligence, I'm assuming you are planning on raising money to buy the asset.  The real problem is that the point of due diligence is to decide if you want to continue with the purchase.  If you are doing a syndication, typically you would start raising funds AFTER due diligence.   Personally, I pay out of my pocket for all of those up front and recognize I am at risk of losing all those funds.

If you do not have the cash, you would need to find someone that wants to partner up with you, ideally before you put in an LOI. Alternatively, you could start raising money now but it is going to be difficult at this time to get people to part with cash when you have no specific asset targeted.

To your last question, all the costs associated with the purchase are typically reimbursed by the business.