Real Estate Due Diligence vs. Risk Informed Decision Making

Aug 14th, 2019

Real Estate Due Diligence vs. Risk Informed Decision Making stems out of reading a real estate deal due diligence guide by Jon Hegwood.

The guide states that “the due diligence period is a formalized discovery window to confirm assumptions, identify potential hiccups, uncover unforeseen issues, and ultimately, determine the feasibility of a project. It’s the active mitigation of physical, financial and legal uncertainties”.

Given that definition and our experience in large contracts, Mergers and Acquisition risk assessment it was inevitable that we would draw parallels. That’s because at the end the game is a risk informed decision making one allowing tactical and strategic decisions.

The real estate due diligence process

Following the guide, a comprehensive real estate deal due diligence process should include elements such as:

Establishing a deal team of experts which should be trustworthy, reliable, and qualified. It is paramount to avoid any conflict of interest, like it should happen when selecting a risk assessment/management team.
Understanding the financial feasibility of the deal. This phase means understanding risks generated by financial hazards such as FOREX, interest rates, but also, possibly new taxes, tariffs, sanctions. Given the uncertainties this phase must be the object of probabilistic analyses based on historic data and forward projections.
Reducing the blind spots. These are hazards lurking within and outside the property/project/operation. These can be pre-existent, or future occurrences like a flood, a seismic event, etc. However, they can also be legal, administrative or compliance based. In summary, they can hit production, sustainability and reputation through multi-dimensional consequences. Finally,
the operation due diligence. We would equate this to the ERM (Entreprise Risk Management) approach of the deal/property/project.

Deal killers are intolerable risks of strategic nature

The guide adeptly points out that no roadmap can be prepared without hazard warnings. We could not agree more and adamantly say that roadmaps should be supported by multi-hazards risk assessments.

Intolerable risks of strategic nature are those that cannot be brought to tolerable levels with reasonable mitigative investments.

The list of these is impossible to prepare as magnitude of the hazards, vulnerability of the structures, legal and physical environment enter in the analyses. However, we cite below a few possible candidates:

Subsidence
Seismicity
Soil and water contamination and finally
Hurricanes, etc.