Common Excuses for Excluding Real Estate from Due Diligence
"All our real estate is Leased..."
There is RISK in both Related-Party and 3rd-Party leases.
Related Party Leases
Almost always above market rent and terms
A professional analysis is required to determine FMR and terms.
Oftentimes are triple net where the Tenant is responsible for maintenance, repairs, and replacements of roof, structure, mechanical, electrical, plumbing (MEP), parking lot, drives, etc. Deferred Maintenance is a risk
Other areas of risk such as change in control and recapture need to be scrutinized. This is critical as each portfolio company will be sold.
"attorneys review the leases to protect us..."
Legal Review is not Sufficient
Legal terms address rights and remedies in response to a problem or dispute that may never occur (hypothetical). PPA focuses on financial and operational terms of the lease (actual)
PPA proactively identifies financial and operational leases in flexibility and risk, and recommends solutions to mitigate this risk, if possible, e.g. exchanging cancellation rights for a reduced security deposit.
perceiving real estate leases to be of little risk and "we do not have the time"
There is both quantifiable risk and immeasurable risk in Leases.
PPA has saved clients quantifiable amounts of money or provided deal risk or deal killer mitigation. On six (6) noteworthy assignments PPA achieved the following results