Due Diligence Reports
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!
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.
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#2 Commercial Real Estate Investing Contributor
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- Dallas, TX
Pay out of pocket, conduct them all simultaneously or as much as possible. Its just a risk of doing deals. You can recover from investors once the deal closes.
@Greg Scott & @Ronald Rohde points taken! Thank you for your feedback!
@Pope Lake, as others mentioned, these are considered "Pursuit Costs," or the cost of doing business when purusing deals therefore they become a sunk cost. The more experience you have, the more you can determine what may appear on the PCA and the lease audit with good questions and a thorough tour. So, the main risk becomes the ESA Phase I expense. In the grand scheme of things, a couple of thousand dollars is worth the cost to avoid a bad deal.
Best of luck!