RE Debt | Managing the due diligence process

hard assets's picture
Rank: Orangutan | 266

I'm fairly new to the world of private debt. While I feel fairly comfortable building out a model, I find I have been struggling quite a bit with all of the due diligence. How did you all learn to go through this process? Or what is the process for due diligence at your firms?

Specifically i'm talking about: abstracting leases (understanding all the in's and outs), survey reports, going through construction contracts/documents, insurance, going through 3rd party reports (seismic, Phase I, Zoning, etc), working with legal on documentation.

I'd love to hear all of your experiences and/or how this process works at your firms

Comments (34)

Aug 13, 2018

Also curious on this, work in I-Sales and haven been struggling with this as well.

Aug 13, 2018

Are there any specific things you've been struggling with? It would be great to hear how everyone approaches various diligence items, key things to look for & how to find them...

Funniest
Aug 13, 2018

lol holy shit this is a dry topic

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Aug 19, 2018

Fact! But it is part of the process, which is why i'm curious to hear what people have to say

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Aug 14, 2018

interested as well

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Aug 19, 2018

I'd also interview the regional manager about future development plans to estimate future borrowing needs.

Aug 20, 2018

I just finished my first year UW RE Debt & Equity as a consultant and our clients rely on us to run the DD process so I may be able to help.
Lease abstracts - Familiarizing yourself with the sections where the salient information lies will increase your speed. We offshore 90% of the abstracting but follow the same form for every deal.
3rd party reports - All third party service providers follow a unique report format and I can now scroll quickly to find where EGI Consulting vs. Nova Consulting break down their replacement reserves or ADA compliance quickly.
I have DD training materials I can send offline. PM me.

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Aug 21, 2018

Can you send me the DD training materials?

Sep 2, 2018

Thanks, sending you a DM now!

Sep 6, 2018

Can you PM me as well? Thanks!

Sep 7, 2018

Can you send it to me as well

Nov 30, 2018

what company?

Most Helpful
Aug 20, 2018

I will preface this by mentioning that I work at a large life company that has done lending for 50+ years, so they have this process down pretty well and we have a fair amount of support staff, but essentially, originators handles the memos/term sheets/applications and AM/Closing (with the help of legal) does everything else.

Every deal we do starts with a closing checklist that contains all of the items needed to close (these are generally copied from deal to deal and then tweaked as needed).

We farm out lease abstracts, Insurance is reviewed by our insurance team, and ESA/PSA are handled by our architectural/engineering team. With those items, it is more about getting them paperwork/information and then troubleshooting when something is wrong (insurance coverage is too low, you have vapor issues, a crapload of undisclosed termination options, etc.).

The rest of the DD (legal documents, organizational chart review, appraisal review, etc.) is all handled by the closer. However, I will say our legal is really good about boiling down/creating a list of business items in the docs that we need to decide and handing the rest themselves, so that helps a whole lot.

Honestly, your job is really to identify how far your company is willing to deviate from their standard language and then make sure you color inside the lines. The one thing that you will hear/say a lot is "what have we done in the past." Lenders, similar to judges, don't like to set precedents. With balance sheet lending, it is common to have more than one deal with a borrower. As such, what you don't want is to have not done something/given something away once, and then have it thrown back in your face over and over again (it usually goes along the lines of "...well in xyz deal, you didn't ask for that, why do you want it now"), which beyond creating relationship issues, is how borrowers chip away at your position as a lender over time and make things more favorable for them.

P.S. Usually, when I'm in the middle of heavy due diligence review, I'll book a conference room for a couple of afternoons in a row, put on some headphones and go in there to read/spread shit out.

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Sep 4, 2018

Since you mentioned "balance sheet "lending, what other kind of lending are there? I thought it was implied that if you are lending, it is from a bank/financial co.'s balance sheet?

Sep 4, 2018

Usually lenders fall into 3 broad categories - balance sheet (those who make the loan and retain them), CMBS (loan is made and then sold into a trust via securitization), and Agency (loan is made and then sold to a GSE).

Sep 6, 2018

CMBS

Nov 25, 2018

how many deals are you usually managing at the same time?

Nov 30, 2018

Hi Inspired,

You're question is a little too vague. To put it in a finance perspective you just asked "I want to buy XYZ company, where does one begin?" or "I want to build a house, where does one begin"

Begin from where? We obviously cant type of the whole process in one post (whole text books cover this and not even in good detail), If you have some more specific questions I'm sure we can help!

Nov 25, 2018

My team closes around 20 deals a year and there are 2 of us in AM/Closing. Our average closing takes about a month so I usually end up with 2 at a time (one will be kicking off just before the other closes). This year was a bit lumpy on the production side so I spent Mar to Jun with no closings and am handing 4 right now with the year end rush.

Nov 30, 2018

Its all problem solving, you need know the problem in order to solve it

Nov 30, 2018

If you are the money. You hire someone that can implement the strategy, likely a well know management company that has value add abilities.

Aug 20, 2018

Reps. The more repetitions you get, the better you'll be. It's something you pick up over time and lots and lots of reps. If you seem lost now that's ok.

Sep 6, 2018

Second this. I work on the lp equity side and when I first started, my md said it takes 5-6 deals before the fog even begins to lift. The biggest thing I struggled with was figuring out how far to get into the weeds. Best rule of thumb i found is to shoot for a 30k ft view of everything and to lean on legal, insurance reviewers, and other players in the process to check your blind spots.

Sep 7, 2018

thats helpful to know. the debt fund i work at does so many complicated and hairy deals, so i'm sure a level of repetition will surely help with having a general framework but each deal is so unique that i feel like i'm always going to be running a little blind hahah

Sep 5, 2018

For those of you in RE Debt, how long does it typically take for you to close a deal from kickoff to closing?

Sep 6, 2018

Can range anywhere from 30-45+ days

Sep 6, 2018

How often do you manage to get deals done in 30 days or less and what level of diligence do you do?

I feel like i've been seeing a lot of request for 3 week closings lately and I just can't understand how to do a full diligence and underwriting that quickly (while managing more than one deal lol)

Sep 8, 2018

3 - 4 weeks isn't unheard of if the Sponsor already has docs/is known to the Lender (or they don't hire crazy lawyers). I've done closings with a known Sponsor in as little as 2 weeks (this was an acquisition where the Sponsor already had third parties that were acceptable to us as Lender).

However, I will say that this year, it seems like every closing I've worked on has taken longer and longer. The last two closings that I've worked on both took closer to 3 months to get everything sorted and closed.

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Sep 18, 2018
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