Pro Level Due Diligence

Now that we’ve really dug into the details about deal-making in commercial real estate, it’s time to get into the weeds concerning deal-doing. This episode talks about how to go about due diligence in CRE at a pro-level. Hear Michael’s perspective on the three main things for keys to success in real estate due diligence. We’ll talk about the big buckets of due diligence. As always, you can find the video, audio, and text versions of this episode of the A.CRE Audio Series below.

As a side note, we’d love to hear from you guys! If anybody had questions or comments, feel free to follow up if you want to get more into geeky details. We couldn’t do any of this without you, so we’d love to get in contact.

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Episode Transcript

Announcer (00:01):

Welcome to the Adventures in CRE audio series. Join Michael Belasco and Spencer Burton as they pull back the curtain on everything commercial real estate and introduce you to some of the top minds in the industry. If you want to take your skills to the next level and be part of a growing community of CRE professionals across the world, this is for you.

Sam Carlson (00:25):

All right. Welcome back to season three. I’m excited to jump into today. Today, we’re talking about due diligence. All right. Now, I promise you guys, if you’re listening to this and you’re thinking, “Well, I don’t know if this episode is for me.” I promise you, we have stories, we have cases, a lot of things that are going to really simplify and make this process of finding problems, finding out whether or not you really do have a deal, a lot more fun and entertaining to listen to than just strictly jump through a checklist of due diligence items. So, to get us started, Spencer, let’s turn it over to you. Or Michael. Which one of you guys want to start?

Spencer Burton (01:05):

Michael’s taking this one.

Sam Carlson (01:06):

I was going to say Michael’s the due diligence man.

Michael Belasco (01:08):

I can take it. So, yeah. As our good friend here Sam had said, this can be a very tedious, task-oriented, check-the-box process. And so, to explain it and walk through it would probably not be the best for everyone that’s listening out here. So, we’re going to define this at higher levels. We’ll talk about three main things for keys to success. We’ll talk about the big buckets of due diligence. I’d encourage anybody listening as of late, between due diligence, closing, and managing, it’s something I live and very familiar with. I’d love to hear from you guys. If anybody had questions or comments, feel free to follow up if you want to get more into geeky details.

Sam Carlson (01:50):

Yeah, that goes for every episode. That’s actually a good point, by the way. I mean any episode, this information this season is so needy, where it’s like follow-up questions and scenarios would be really fun to hear from the listeners. So, yeah. Good idea.

Michael Belasco (02:05):

Totally agree. We would love to nerd out and get in the weeds. So, let’s talk about keys to success and how I define success. And really, it boils down again to three things. First thing is the main goal of due diligence. You are sussing out risk, you’re identifying risk, and you’re making sure that either everything can be solved or that you solve anything or that you uncover issues that could be extremely problematic. Now, this could be financial related. It could be liability related as it comes to environmental or your physical. There are all kinds of categories that relate to risk.

Michael Belasco (02:47):

The second is you have a window of time to do due diligence and to what’s usually when that time ends, you have money that you’ve committed upfront, we call it earnest money. That money will go hard. You need to make sure that you are understanding the timelines and making sure you’re hitting your deadlines and that if you’re going to bust those deadlines, there’s some proper communication with the seller and maybe you work that out. So, timely completion-

Sam Carlson (03:10):

Yeah.

Michael Belasco (03:11):

… due diligence. And then, the last piece, which is the recurring theme is maintaining and keeping the relationships good, because this is with the brokers, the seller, your capital partners, it’s very important that you keep those relationships going well and that’s by executing a very well-run and professional process and that you don’t leave things to the last minute. So, those are my three keys to success.

Sam Carlson (03:34):

Can you say number one again?

Michael Belasco (03:35):

So number one is that you’ve properly mitigated and identified all risks.

Sam Carlson (03:40):

Okay. So… Go ahead.

Spencer Burton (03:42):

Yeah, let me speak to this because this is important. So, from the maker side of this equation, what that really says is how we understand the deal reality or in other words, does the plan match reality? And so, Michael frames it in terms of risk. Every investment is a calculation of risk relative to return. And there is, I can say, no risk that can’t be mitigated through adequate return. Now, all right. Even the greatest of risks can be mitigated through adequate return. Now, it doesn’t mean though certain buyers, certain investors may not have the appetite for risk and therefore, would pass on a deal even if the return was sufficient, but really what Michael’s job in the due diligence team is to help all of us understand, does the plan or does the risk-return calculus match the reality?

Michael Belasco (04:51):

Right. Exactly. Does this match the reality?

Sam Carlson (04:54):

All right. So, in a scenario where we’ve got deal A and deal B, okay? And maybe this is a bad scenario, but I’m just thinking from a very simplistic way of thinking, one deal gets done, one deal does not get done. That process or whether or not that happens, assuming you at the deal making stage have said, “Hey, this thing is worth going in on. We want to do this.” Okay, we’re assuming that both A and B have passed that threshold. Now, we jump into deal A getting done, deal B not getting done, what are the likely… what does that process look like? I guess, where do problems usually start to arise in that particular process?

Michael Belasco (05:44):

Now, problems can arise in many different areas and I’ll give one example. Now, you talked about property A and B.

Sam Carlson (05:52):

Yeah.

Michael Belasco (05:53):

And I’ll give you an example of the same subject matter where property A went through and property B did not make it through. And ultimately, in these two scenarios, when you find risk and you uncover risks, there is a process by which you work with the seller if you’re the buyer and you try to come to some resolution. Usually, the seller’s obligated to mitigate or you work out some reasonable solution, especially if it’s financially related, which as is the case with these examples. So, to back up real quick, when we are looking at the large buckets of due diligence, we can break it out high level. There’s a bunch of ways to break it out. High level for purposes of this conversation, three buckets, there’s physical, environmental, legal. And this scenario or conversation will focus on legal? Are you going to… I saw you looking.

Spencer Burton (06:42):

No, no. I’m really interested.

Michael Belasco (06:48):

Good. All right. So, two properties, one in California, one in Florida, okay? These are two properties that we’re looking at and we’re going through the leasing one and we’re looking at really the macro level in another. In the leasing one, we noticed there is a cap on taxes that the tenant is obligated to pay. Obviously, this is a single-tenant deal and in our understanding, in our underwriting, what we look at the cap to be, the actual amount that we would be obligated to pay or the property would be obligated to pay based on our understanding of how the taxes will be worked out once we own the property, there would be a bust in period one, and there would be further increases thereafter. So, you’re looking at owning this property long-term.

Michael Belasco (07:41):

Well, the way we understood this property to be was that we would have no tax obligation and that’s how we underwrote it. So, you look and you see the scenario, you can maybe challenge the taxes, you’re bringing in tax specialist attorneys, figure all this out. It could become very messy. So, we simply go back to the seller, we do this underwriting, probably go back, adjust our underwriting and this property, we did our DCF, look back now at this tax break and what was it? Close to 700, $800,000 in a hit to the actual price. So…

Sam Carlson (08:17):

Can I stop you here real quick?

Michael Belasco (08:18):

Sure.

Sam Carlson (08:18):

So I’m wondering, in this transaction in particular, was that particular item brought up by the sellers or did you uncover it somehow?

Michael Belasco (08:29):

Right. So, you always have to make sure. So we, as the people representing to our capital partners, that we are indeed buying what we’re saying we’re buying when we presented it.

Sam Carlson (08:41):

Yeah.

Michael Belasco (08:41):

The seller and their broker are obligated to do the same thing. Now, sometimes it doesn’t always happen, maybe they missed it themselves, maybe it’s incompetence, maybe it’s on purpose. So, no. So, that’s the type of thing where, for example, you might not have the lease in hand when you’re going to make an offer on it, so you get that in due diligence and you look and you discover these types of things. So, no, in this particular scenario, we were not made aware. This was something that came out through the process.

Sam Carlson (09:06):

And is that something that comes up… How does something like that come up? I mean, because I’m guessing this is also state specific or location specific as well, but how does something like that pop up during due diligence?

Michael Belasco (09:21):

Yeah. So in this particular example, we bucket things. There are certain categories that buckets beyond physical, environmental and legal. The one piece that’s critical for us is lease, having a lease abstract. Understanding where the key risks could be, right? Leakage in general. And if you don’t know what leakage is, basically, you understand buildings to have certain opex costs or capital capex costs and anything above that, that you discover is considered leakage. So…

Spencer Burton (09:50):

Well, leakage is what you can’t recover, I guess.

Michael Belasco (09:53):

Yeah. Sorry. So, we discovered this leakage in the building, right? So, leakage is what you can’t recover. We weren’t anticipating having any leakage in this property and this became discovered within the lease review.

Sam Carlson (10:05):

Okay. So, I didn’t mean to take you off of the example because I know… so, in this deal, this tax situation comes up, you then go back to the seller, start to negotiate or whatever the case may be. I don’t know if this is the deal that closed or didn’t close. So, I wanted to get back to that.

Michael Belasco (10:21):

So, you go back to the seller with something that, to them, is untenable because they look at the market and in their mind, $700,000 is, in relation to this property, is out of market to them and it was out of market to us. And so, we did as much as we could. We had many conversations with them, ultimately ended up that we could not go forward with this property. So, it ended up getting kicked out. So…

Sam Carlson (10:46):

It’s curious, you wonder if that was the first time that they learned that, when they go back to the marketplace, how they then adjust for that new information, because they can’t go back… I mean, I guess they could, but it doesn’t seem like a realistic thing to do.

Michael Belasco (11:07):

We went deep on it, to which they didn’t and we had our… we valued that and did our research and came to that conclusion and… to which they may or may not take, right? And it’s interesting to think about when they go back out to market, what they say. Now, they should. They should disclose that going forward. In my opinion, they’re obligated to.

Sam Carlson (11:32):

Oh, absolutely.

Michael Belasco (11:33):

Yeah. So…

Spencer Burton (11:33):

So, how do you address these items with a seller, right? So, something comes up like this, a tax cap that results in leakage that you hadn’t expected. How do you go back to the seller? How do you frame this? What are some techniques there that you could offer?

Michael Belasco (11:53):

So, first off, to your point, in a previous episode, communication, it’s immediate. If there’s something you’ve discovered and you think it’s viable, you go back immediately and you say, “Hey, I think we’ve discovered something.” It’s good… not format, what’s the word I’m looking for? It’s good…

Sam Carlson (12:12):

It’s just a good tactical approach.

Michael Belasco (12:13):

Yeah, it’s good tactics.

Sam Carlson (12:14):

Good manners almost. Yeah.

Michael Belasco (12:16):

Yeah. It’s like, you get out there, you get in front of it. Yeah. You’re open. You say, “Hey, we’ve discovered this issue. How do you want to address this? Here’s what we think.” You do research and make sure that you have something to go back with about why and what the potential is and you go back and you have that conversation. There may be a price adjustment, you just want to make sure that you’re upfront about that, but you try to resolve it all the way. So, it’s a constant conversation. How do you want to react? And every situation is different. I don’t know if you’re thinking of anything specific in terms of…

Sam Carlson (12:45):

Can I ask you a question real quick before we move forward? I’m wondering during due diligence, how often this goes back to renegotiation, because if you were to find something like that, I’m guessing there is a situation where even if you do uncover something like taxes that you weren’t expecting, you could have salvaged that deal by renegotiating the price. I’m wondering in your capacity of doing due diligence, does it frequently go back into renegotiation or is it rare?

Michael Belasco (13:16):

Now, most times, in my experience personally, the property is represented as is. Now actually, going back and doing the math, I’d say 20 to 25% of the deals actually do fall out, in my experience that I’ve worked on through due diligence based on that. But it’s partly, I would chalk it up many times to them not being aware of it, almost always. It’s never intentional or intentionally trying to mislead in my experience or based on my perspective. You might disagree because we see some of the same stuff, but it’s always a discovery and it feels like it’s new news to them, but you never know.

Sam Carlson (13:59):

Go ahead, Spencer.

Spencer Burton (13:59):

I was just going to say it’s an interesting dynamic between say the acquisitions team and an acquisition shop or the development team and the development shop and the due diligence team. At the due diligence team, they are not emotionally attached to the investment-

Sam Carlson (14:17):

And you are.

Spencer Burton (14:17):

…and we are. And we’ve presented the deal, we’ve put the deal under contract because we like it. And so, there’s always a tension between the due diligence team and our team, simply because of that fact. And I think that’s healthy by the way. I think it’s healthy. Really, they’re taking the skeptical lie and we’re advocates for these investments. And so, in scenarios such as the one that Michael shared, those sorts of scenarios is very much… we want to get involved at that point. We want to-

Sam Carlson (14:55):

You want to get involved in the renegotiation?

Spencer Burton (14:58):

The renegotiation, yeah. Mainly because we want the same thing as the due diligence team, but we also see the upside as well as the downside and it’s our ultimate job to calculate the risk and their job to bring the risks to us and then collectively, as a company or the investment committee, depending on the structure of the decision-making, decide whether this new discovered risk is properly mitigated, either through return or through some other mechanisms.

Sam Carlson (15:34):

So, here’s a question. So, Spencer, when you’ve got a deal, you go under contract, you send it off to Michael and it’s going through due diligence, as far as like over the year, do you have an anticipation that, “Hey, 10% of or whatever the number is, are not going to go through.” And you know that beforehand or are you thinking you want… you have a filtration process. I think on episode two of this season or three maybe, you had talked about what you currently do. You underwrite a ton of deals, and then, you’re focusing on that top 5%. And then, I’m guessing you’re narrowing it down even further from there to the point to where that what you’re looking at is in your mind, right within strategy, right? Or else you wouldn’t otherwise move on it. So, I’m wondering with that mindset going in, do you still maintain a position of where you say, “Hey, just by the nature of deals, getting deals done, we anticipate to lose X percent of these deals.”?

Spencer Burton (16:43):

Look, we don’t want to lose any.

Sam Carlson (16:45):

Right.

Spencer Burton (16:46):

I mean, attrition’s just the nature of the business. 20% is too high, the acquisition team is not doing something wrong, but could do things better if 20% of the deals are falling.

Sam Carlson (17:05):

That’s what I was going after. Something like that.

Spencer Burton (17:06):

Some of that’s the nature of the property type that you’re dealing with and how much information you have at the offer stage. And a lot of that is the nature of the broker or the brokerage world that you’re in and how much information that broker is seeking and then sharing with the market. The less information that we have at the offer stage, the higher the attrition rate’s going to be and I’d like it to be closer to zero and 20% just means that the acquisition team can do better.

Sam Carlson (17:41):

That’s my next question. So, the acquisition team can do better. So, in the last episode, I talked about my capacity as a loan officer and how when I presented deal or a loan package in this case to an underwriter, I would like to have as comprehensive an upfront presentation of what I was doing as possible. And if I did that, my success rate of closing a transaction was a lot higher. So, I guess your last statement there leads me to believe that there is a lot of things that you’re doing to plan to make sure that you’re presenting as comprehensive a file to the due diligence team as possible. Is that right?

Spencer Burton (18:25):

Yeah, that’s exactly right. Let me give an example of… actually, a parking lot that I was… the firm I was working at, we invested in. A parking lot in Chicago, and if you’re familiar with Chicago, pretty much every property in Chicago proper has environmental contamination. Okay? And so, when you invest in a place like that, as an acquisition team, you immediately know to ask, “Hey, what environmental challenges does the property have?” The seller was great. They disclosed everything and we received all the documentation. What had happened is there was environmental contamination under this parking lot. There had been some mitigation that had taken place. There was not yet closure from the agencies that manage that, no further action letters a common term, it’s slightly different in Chicago, but there wasn’t official closure. And so, before we even pursued this further, we went to our environmental team, which at the place I was working at the time just had a phenomenal environmental team in house.

Spencer Burton (19:35):

We presented what we had. They had already experienced with Chicago. They looked at it and after some discussion said, “Yeah, actually I think we can get past this, but we’re going to need some cooperation from the seller in this case.” And so, ultimately, we went forward with it, knowing eyes wide open what we were getting ourselves into. And by the way, the return and the opportunity outweighed this risk and this ultimately was a carried land play. When we say carried land play, meaning there’s income that the land is generating, but our longterm objective actually is to develop this property. So, we’ll carry the land with some income in this case, parking income, and long-term, we’re going to develop and pretty much every development in Chicago has some environmental risk and contamination that has to be cleaned up.

Spencer Burton (20:27):

And we therefore factor that into the proforma. We expected some environmental cleanup. We brought in an environmental consultant on day one of our due diligence who that environmental consultant knew what to look for and ultimately, our due diligence at that point was about ascertaining the cost of the cleanup. And anyway, so the point being that from the acquisition side, the more information we have and the more that we can interact with our due diligence team early on, the less likely there’s going to be attrition, less likely that we’re… I mean, I’d hate to have a deal fall out because it hurts your reputation, it’s a lot of time and money that you’ve spent to get to that point. And so, the sooner that you can either pass on a deal or get comfortable with a deal, the better.

Sam Carlson (21:22):

So, we had started out, we had deal A and deal B, right? And deal A really took us in an interesting direction because we were able to just see you had this fallout, what happened and that took us down a nice little discussion here. So deal B, you had a similar thing happen. I’d love to hear kind of that situation and how you salvaged that deal.

Michael Belasco (21:43):

Yeah. So, this was another tax issue. Now, this was out in California. So, it was not in the lease. This comes from just experience. Luckily, I had been in California and had known and as we were going through this, it had caught up during due diligence, what basically the issue is around tax for this certain property. So, when you get your initial underwriting or you get your OM and you’re looking at it, you’ll take the tag, you’ll take your historical statements and you’ll just project them forward. You’ll assume taxes are a certain amount and that’s that. In California, the interesting thing is, I believe it’s prop 13, so what happens is when a building trades, the value of that building gets reassessed. Now, prior to that building trading, it’s capped every year, the tax is capped every year, 2% increase, that’s as much as it goes.

Michael Belasco (22:43):

If you bought a building in 1960, it was riding 2% increases every year and then you go to buy it in 2020, just imagine the hit, right? And in this particular deal, we were on the hook for property taxes in this one. So, we had realized that throughout our due diligence, that there was going to be this reassessment at the building. I think the building was bought 10 years prior, it was the last time it traded. So, there’s going to be a significant bump in the tax.

Michael Belasco (23:17):

So, we had found that, we had then gone back to the underwriting, Spencer’s team added that in and the value changed. So, we went back to the seller and in this case, the seller actually did not realize that. So, the broker went back to the seller and said, “Look, this is going to come up for any other buyer in the future. Those people are going to figure this out at some point. So, why don’t we try to work this out?” And so, that became a negotiation and we ultimately got to a good place where the seller was happy, we were happy and we were able to close. So, that was a good outcome. There was a reduction I want to say it was roughly 200,000 in the price. So, it was sizeable and it ended up working out.

Spencer Burton (24:01):

Well, I think… yeah, so, the only piece saw I’ll offer here is first off, every offering is different and the amount of information that is shared with the buyer varies greatly, right? And in this particular case, there was a proforma that was created by the sellers team. That proforma then resulted in a value. This was a very simple single tenant deal. So, that value that was ultimately the value that we were willing to pay was based on a proforma. Well, in due diligence, it became obvious that the proforma wasn’t accurate because this tax issue had not yet been addressed in the proforma. At the underwriting stage, we assume that it had been. It turned out, it hadn’t been and that was discovered during due diligence. And so, that was the leverage. My point is like, why would a seller do that?

Spencer Burton (25:09):

Because the buyer should have known, well, we had been led to… not led to believe, but it was our understanding that the tax reassessment had already been accounted for in the proforma and that wasn’t the case. And therefore, it was just a matter of going back to the seller and the seller’s representative and saying, “Hey, this proforma that this value is based on, we don’t think it’s right. And this is the reason.” And they were really good to work with. And you’re right, caught it and you’re right. We agreed to a reduction in the price.

Sam Carlson (25:42):

I wonder if you’re the broker, in this case, said, “Hey, any buyer’s going to come up with the same information. So, regardless of whether or not we deal with these people who are working with us now, or somewhere in the future, this is going to be an issue.” It was that way. For example, number one, that was the same thing.

Michael Belasco (26:00):

Yes, the thing with example number one, is it took a lot of digging and it was more complex. We had to engage a tax attorney just to get some… a rough idea of what was going on there. So, it would take, I would say, a more sophisticated buyer to dig in and then go through those details.

Sam Carlson (26:18):

Oh, really?

Spencer Burton (26:19):

So, it almost sounds like there was a disagreement between you and the seller about this point.

Michael Belasco (26:24):

Right? So, we ended up coming to… Well, we don’t know if we gave them all the information, everything we had done, an opinion or two or three, I think we actually got the local tax assessors to actually email us and give us some thoughts and we had shared everything with them. So, this is where we stand on this and this is our opinion based on these facts from local experts.

Sam Carlson (26:51):

I think a lot of us put a lot of stock in the integrity of the people that we work with and that’s been a theme very many times throughout this particular season. And in this particular case, I tend to just sit back and not obviously being involved and not knowing the entire context of that, for example A, but I tend to just sit there and think, “Well, what happens to the next person who’s not a Michael Belasco and doesn’t catch something like that. When due diligence goes wrong. So, what happens when due diligence goes wrong? I mean, obviously an investment goes wrong, but I mean, what can we talk about as far as when due diligence goes wrong?

Michael Belasco (27:35):

Yeah, I mean, you miss something big like that and you pay for it.

Sam Carlson (27:38):

Yeah. Is it as simple as that?

Michael Belasco (27:39):

Simple as that.

Spencer Burton (27:41):

Let me give an example. Yeah. So, a Walmart with environmental contamination that had been caught during due diligence, but the extent of it had not been caught, and it was severe enough that it created health issues within the Walmart and under the lease, because of this issue, Walmart was able to vacate the lease and the owner of the building was left with an empty building and the significant contamination and a significant loss.

Sam Carlson (28:27):

Wow.

Spencer Burton (28:28):

And it’s one of those things where it hadn’t been fully vetted, the issue and a significant loss as a result.

Sam Carlson (28:39):

Is it recourse in those situations?

Spencer Burton (28:41):

To whom?

Sam Carlson (28:42):

I don’t know. I don’t know. I’m wondering.

Spencer Burton (28:47):

Rarely, if ever. You’re dealing with sophisticated parties, should have known that there may be recourse against the original developer. There may be recourse on behalf of the lender to the borrower if something wasn’t fully disclosed. There may be recourse to say the consultant, but generally, it’s not worth the time and the legal fees to pursue and in this case, it was “tear the building down and start over again.” Yeah.

Sam Carlson (29:17):

Wow. That kind of makes me… I mean, there’s a lot of pressure on that phase. And I mean, again, those situations makes me think, hey, a brand new hat for that, for the due diligence phase is merited. You can’t wear the same hat that he’s wearing.

Michael Belasco (29:37):

Yes, that’s exactly right. So, yeah. Throughout my real estate career, I’ve worn a couple of different hats. Now I put on that hat to… And I can’t put on the hat of the acquisition team or the sourcing team to say, I need to make this work. I need to be the voice in the room that says this doesn’t work and we need to have that debate out in the open, not internally in my head to justify anything. I just can’t do that. But to your point to the pressure, I wouldn’t call it pressure. As long as you have a process laid out by which you’re checking off all the boxes and you’ve gone through all your pieces. So, you need to have an organized process through each of these things. Hire a good team. You have your process, you have third parties you work with, but lease issues, like that environmental issue in the lease, if there was that clause there, you should have a methodology by what you’re sussing out every single one of those, those risks and that should have been something that was caught, that environmental risk.

Spencer Burton (30:34):

The other thing is it’s important that decisions are made by a group rather than an individual, right? There should be gates along the way where a team comes up with a conclusion, brings the conclusion before some authority, somebody within the organization that can review all the facts and then together, make the decision and bear upon their shoulders the outcome of that decision, rather than it being bore by one individual. And in most real estate shops, that’s the investment committee. Some shops will have subcommittees, like a due diligence group that will approve a deal past due diligence. Michael used a term go hard, what that means is your earnest money becomes non-refundable or in other words, for the most part, you’re committing to close this investment at the end of the due diligence.

Sam Carlson (31:30):

Or forfeit your money.

Spencer Burton (31:32):

Or forfeit your money. Right. And so, it’s, to me, healthy for an organization to put the onus of that decision on a group rather than an individual and that allows the individual to be forthright in everything that they’re learning, but also, to not feel the stress of, “I have to make the right decision here or it’s all on me.”

Michael Belasco (31:57):

But the stresses of making sure you’re identifying that… the bad outcome in this type of scenario is that a risk becomes discovered that was never identified. So, that’s where having a solid process by which you’re identifying risk is critical.

Spencer Burton (32:14):

Well, Let me just make one more point on this. So, it’s easy for an institution to have that framework, right? We’ve got a team of people, they make the decision. If the decisions a wrong decision, it’s shared by the collective. What about if you are an individual and you’re making an investment in an apartment complex and you’ve got a syndication of investors behind you and you are making the sole decision. I mean, that’s a lot of pressure. So, what’s the answer to that?

Sam Carlson (32:43):

I was just going to say, what about it?

Spencer Burton (32:45):

I think the answer is to have an investment committee, right? You may be the sole employee, the sole individual that’s running the shop, but you have the ability to bring together a team of people that you trust that can help you make the decision together and then get buy-in from your team of investors that, “Hey, yes, I’m leading this, but I’m socializing with a group of two or three people.” And by the way, hopefully it’s a few of those kind of the larger investors in your syndication that are weighing in on these decisions, at least hearing all the facts that you have and helping you make the decision. And again, it’s not about pushing blame on the others, but it’s about taking some of that pressure off of your own shoulders so that you can think more clearly.

Michael Belasco (33:35):

Well, it’s getting consensus and you don’t have all the answers or the strategic wherewithal sometimes. So, you socialize that and you get that feedback to help. Not only just take the burden off, but make sure that you’re doing the best thing or making the best decision.

Sam Carlson (33:53):

Michael, I’m going to ask you for just a summary of due diligence, some parting pieces of advice for people who either work with people in that capacity or perform that capacity. But as I think about this, I’m thinking you’ve got an important job, obviously and the tension that Spencer spoke of, I think a lot of times within companies, whether businesses or anything else, there are these natural tensions between these groups of people and that’s healthy, but there’s always the next deal, right? There’s always another deal. And so, this is why just to kind of maybe bring full circle, this strategy side of the conversation of season three, you come up with a strategy, you’re sourcing deals, due diligence is part of your strategy. You can’t be so married to an idea, to a deal, that you make that tension greater than it should be or you put more pressure on this process. At the end of the day, if it’s a deal that Michael’s not feeling passes the smell test, you got to go out and get another deal.

Sam Carlson (35:11):

You got to put more… or help him find a solution to that problem, right? So, it is interesting. As simple as the idea of you could just say, “Well, we’re underwriting a property. We’re going out. We’re getting these documentation. Finding out whether or not…” There’s more to it than that. There’s more writing on it than that. You’ve got deadlines, you’ve got quotas to fill, different… you’ve got to get deals done and due diligence is a huge part of that. It seems to me like conversations that I’ve been involved in that involve strategy or investments, things along those lines, it’s a very small part of the conversation, but the impact is huge. So, I’ll put it back to you to finish us off here. In terms of advice for people performing due diligence, maybe as an independent owner or in your capacity with a team in a company, what is some advice that you would give to people who perform that task?

Michael Belasco (36:14):

Yeah. So, first and foremost, I think is make sure you have the proper resources in place with the right teams, making sure you’re selecting, whether it’s people going out on site for environmental studies and all that kind of stuff, just making sure you have the right team in place. A team that works well, a team that has a good rapport, reputation. Stay organized. That’s critical. It’s all about… It’s really a deadline.

Sam Carlson (36:40):

I’ve heard you say that a couple of times now.

Michael Belasco (36:42):

It’s really critical. Just making sure you have everything organized and that you know when deadlines are coming. You back in, if you have 40 days to do due diligence, you’re backing into all your expectations, you need time to review these studies. So, it’s keeping those deadlines, making sure that you are just on top of all that stuff. So, organization’s key. That’s one thing. So, two things so far is proper team in place, sufficient resources, making sure you’re keeping on top of your deadlines. I’d say the third thing is proper communication, whether it’s internally, whether it’s with the broker and the seller, whether it’s with your capital partners, making sure that everybody is constantly up to date so that you can elicit feedback and make sure that you’re giving stuff. When it comes to me wanting to preserve a deal, I can’t wear that hat. I’ll go back. Like, if we’re talking about a deal that the sourcing team’s proud of, I don’t care. I mean, quite honestly. If I kill it, I’ve done my job and I get nicknames for that for sure, but I don’t care, right?

Michael Belasco (37:42):

I’ve worn other hats and this is the role that I need to play. So to me, every time I kill a deal, I’ve protected us and they can say, “Hey…”

Sam Carlson (37:50):

And there’s another deal coming.

Michael Belasco (37:51):

Right, but they could also push back in the committee, right? And that’s Spencer’s point so well taken. It’s like, I could be hard on something and there could be three other people in the room and they’re like, “Well, actually, that’s not right.” And I’m not always right. I’m not right plenty of times. And so, you get that consensus. So, that’ll be my third piece, which I’m just going to piggyback off Spencer’s, make sure you have the resources to vet when you’re making those decisions. So…

Sam Carlson (38:16):

Well, I got to say, for something that seemed like potentially, there was some potential danger heading into the the topic of due diligence. I feel like I’ve learned a lot. Both the stories, the mindset, maybe most of all, the relationship between the makers and the doers. I think it’s very valuable just from a communication standpoint to understand what everybody’s perspective is. So, this has been good. I appreciate it. So, hopefully if you’re listening to this, driving your car on the way to work, you got a couple ideas. You can maybe chime into your boss and say, “Hey, what if we tried a committee?” Whatever the case may be. Hopefully you enjoyed this. Thanks for listening and we will see you on the next episode.

Announcer (39:06):

Thanks for tuning into this episode of the adventures in CRE audio series. For show notes and additional resources, head over to www.adventuresincre.com/audio series. Would you like to learn real estate financial modeling in a matter of weeks and do it with zero guesswork? If so, the ACRE accelerator is for you. The accelerator is a step-by-step case-based program designed to teach you exactly what you need to know and in the order you need to know it, so you can gain both the knowledge and experience to take your career to the next level. To see if the accelerator is right for you, go to www.adventuresincre.com/accelerator.