Case Studies

Investor Benefits from Lower Purchase Price Thanks to Financial Due Diligence
THE SERVICE Financial Due Diligence / Office building aquisition
THE SITUATION The client owns and operates a substantial real estate portfolio comprised of numerous office buildings and shopping centers throughout the United States. They turned to LPRD for assistance in evaluating the merits of acquiring a sizable multi-Tenant office building in Pennsylvania.
THE PROBLEM LPRD’s meticulous review of the leases uncovered vagaries within the seller’s CAM structure. Comprehensive research and financial analysis were required to uncover the true picture. LPRD picked up the challenge and began an exhaustive process of financial due diligence. What emerged was a number of discrepancies between the seller’s income and the actual terms of the leases. Among those discrepancies were: • A complicated amendment subtly overrode one tenant's responsibility to contribute to real estate taxes. • One tenant was being billed for more CAM than it was responsible to pay. • One tenant's CAM obligations were based upon an incorrect base-year amount.
THE SOLUTION LPRD’s analysis of the seller’s base-year figures, current expenses and Tenant obligations made it clear that there were significant discrepancies in the building’s stated value, which would substantially lower reimbursement income. The client directed LPRD to convey these findings to the seller.
THE RESULTS With LPRD’s clear and concise summation of the building’s CAM discrepancies, the buyer was able to successfully negotiate a reduction of the building’s purchase price by 6.2%, resulting in significant savings.
THE TAKE AWAY By utilizing LPRD’s expertise with both leases and financial due diligence, the real estate investor was able to identify discrepancies that revealed the true value of the property. By validating all of the information, LPRD saved the buyer from potential CAM audits and surprises after purchase.
THE SERVICE Financial Due Diligence / Shopping center aquisition
THE SITUATION The client turned to LPRD to review and analyze the seller’s Offering Memorandum for the purchase of a $12 Million shopping center in New York State.
THE PROBLEM The seller presented the building as a “net” property, with all expenses passed through to the Tenants on a pro rata basis. This meant that in addition to their rent, each Tenant was obligated to pay its pro rata share of the property’s taxes, insurance and operating costs. As part of its financial audit, LPRD reviewed all expenses to ensure each was being accurately passed through to the Tenants.
THE SOLUTION Combing through the voluminous documentation, LPRD discovered two significant discrepancies. One problem was that the owner was charging the center’s anchor Tenant a flat 4% management fee, rather than passing through its pro-rated share of the actual management costs. Although a clause in the anchor’s 1980 lease did impose this flat fee, another clause tucked in a 1985 lease modification agreement very subtly overturned the original language and required management expenses to be pro-rated and passed through to the anchor, as they were for the other Tenants. This modification had never been implemented, however, which meant that the anchor Tenant was paying $20,000 more per year than its lease required. A second discrepancy had to do with the property’s utility bills. The owner was passing through to all the Tenants the cost of utilities for one large retail space that was not in use. The owner’s argument was that this expense was required to keep the building in good shape and so was subject to recapture. But LPRD made the case through a close reading of the lease documents that this expense should not have been passed through to the Tenants. The Tenants were being overcharged a total of $60,000 per year.
THE RESULTS Based on the agreed upon 10% CAP rate and with the two discrepancies adding up to a shortfall in income of $80,000 per year, the client requested an $800,000 reduction in purchase price. The seller agreed to lower the purchase price by $600,000.
THE TAKE AWAY Thanks to its meticulous and in-depth review of several passages buried in hundreds of pages of lease documents, LPRD was able to identify issues that resulted in a significant savings to the Client on the purchase price.
THE SERVICE Financial Due Diligence / Developer negotiation
THE SITUATION The client, a large residential developer, purchased a large parcel of land in South Florida with the intention of constructing a 110-unit apartment building. The client secured an acquisition loan in excess of $4.5 million and provided an equity investment in excess of $1 million of capital.
THE PROBLEM At the time the client retained LPRD, there was over $6 million of debt on the property. The client had been desperately trying to bring in new partners and equity to provide some measure of debt relief and save the project.
THE SOLUTION The LPRD team coordinated a multi-pronged strategy which involved: 1. Maintaining continuous contact with the lender to educate them as to the facts on the ground; 2. Conducting due diligence and market analysis to effectively prove to the lender the deteriorating land value; 3. Developing and implementing a legal strategy to provide the client with additional leverage over the lender; 4. Assisting in positioning the client as the optimal solution to realize the highest and best use of the land; and 5. Effectively putting forth all crafted arguments and handling difficult negotiations with the lender to achieve favorable financing terms for the client.
THE RESULTS LPRD successfully negotiated on behalf of the client a reduction of $4 million for the loan on the property. With this reduction, the client was able to meet the debt service without having to secure any additional partners or equity for the project, thereby preserving the client’s initial $1 million equity investment.
THE TAKE AWAY With assistance from LPRD, the client was able to validate the real value of the asset, allow a third-party to negotiate a new solution to the situation. While the client could have tried to do this himself, having an independent, expert third-party to crunch the numbers and communicate solutions removed any personal emotions from the negotiation.
THE SERVICE Financial Due Diligence / Developer financing
THE SITUATION A large national developer, with more than $1 billion in real estate projects throughout the Eastern Seaboard, had a residential development project in the Southeast that was entirely sold out but that was failing due to local zoning and code issues. The residential project was at risk of imminent failure.
THE PROBLEM The project started to lose sales due to zoning and code delays as well as other governmental issues. Additionally, the General Contractor filed for bankruptcy. With the lender demanding order and accountability, the developer needed immediate crisis management and loan workout support. LPRD provided comprehensive crisis management and support to craft a financial solution.
THE SOLUTION LPRD sent in a project team to gather information from every vendor involved in the project. The LPRD team did a complete review of the project’s accounting and prepared reports for the bank and bonding company. Together with LPRD’s due diligence specialists, the project team documented the physical status of the site and coordinated all of the different expert reports to gain a proper understanding of the property’s status at the time it was abandoned by the contractor. Upon compiling the reports, the LPRD team held live meetings with the lenders, bank inspectors and bonding company to properly update them and provide a road map for the future. LPRD also coordinated new contractor bids and interfaced with the bank to secure additional funding to sufficiently cover completion of the project. Finally, LPRD coordinated the legal team to assist with these efforts and pursue all available remedies under the bond.
THE RESULTS On behalf of the client, LPRD successfully settled with the bonding company to recover enough money to complete the project and cover all over-runs and delay costs. The bank was satisfied with the progress and kept the borrowers in good standing throughout the workout process and while the project was completed. LPRD also assisted in bringing in new equity. The project was successfully completed and a Certificate of Occupancy was issued within thirteen months of LPRD’s involvement.
THE SERVICE CAM Audits / Retail
THE SITUATION The Client, a retail Tenant located primarily in the Southeast and New England areas operating a chain of approximately 50 specialty stores, hired LPRD to conduct a Common Area Maintenance (CAM) audit on a trial sample of 12 leases. The goal was to determine if their various Landlords were charging the correct and appropriate CAM expenses according to the Leases.
THE PROBLEM LPRD conducted a thorough examination of the CAM expenses of each lease and the specific terminologies of the Lease, including the CAM inclusions and exclusions as applicable to capped and uncapped expenses. It was discovered that one Landlord had erroneously included a significant insurance charge under the capped expense category instead of billing this insurance charge to the Tenant as an uncapped expense, per the Lease. As the Tenant had otherwise exceeded its capped expense, this charge should not have added any further expense to the Tenant. However, because that Landlord billed the charge under the uncapped portion of the bill, the Tenant had paid its full pro rata share of the expense.
THE SOLUTION Since the Landlord had engaged in this billing practice for three years, the Tenant was due a credit for all three years of CAM payments. The Lease also had an additional three years until it expired in 2011, and an additional renewal option extending through 2018.
THE RESULTS Given that the client saved $5,656.84 per year, the Tenant received an immediate credit of $16,970.53 from the Landlord for the previous three years. Given the remaining three years of the lease, the Client will also save and additional $16,970.54 for the next three years of not having to pay that expense, for a total of $33,941.08 for all six years. If the lease extends through the additional renewal option in 2018 of six additional years, the Tenant will save a total of over $67,882.16.
TOTAL SAVINGS: $67,882.16
THE TAKE AWAY In this example, LPRD’s audit found just one small error on one lease for one Tenant. But chances are your CAM is also being miscalculated and an audit would reveal costly errors. Why? Leases are complex legal documents that are unique for each Tenant. Most often, companies with their own in-house lease administration department just don’t have the time, personnel or expertise to thoroughly review and correctly interpret the relevant clauses of each lease. A professional CAM audit is likely to uncover an error that may save you thousands of dollars over the life of a lease.
THE SERVICE CAM Audits / Restaurant
THE SITUATION The Client, a retail Tenant -- operating a chain of over 450 restaurants across the U.S. with storefronts ranging in size from 2,000 to 2,500 sf -- hired LPRD to conduct a Common Area Maintenance (CAM) audit on a trial sample of 9 leases to determine if the Landlords were charging the Tenant the correct and appropriate CAM expenses according to the leases.
THE PROBLEM After reviewing the relevant shopping center Tenant roster, LPRD noted that the shopping center contained various “Pad Site Contributors.” The specific lease audited contained provisions allocating “Pad Site Contributions” to the overall Common Area Maintenance charge for the Tenant, thereby reducing the overall expenses to be passed through to the Tenant. It was determined that the Landlord erroneously failed to correctly allocate the contributions it received from the Pad Site Tenants.
THE SOLUTION Since the Landlord had engaged in this billing practice for two years, the Tenant was due a credit for both years of CAM payments. The erroneous calculation, already undetected for two years, would have likely continued for six additional years, through the end of the lease in 2017.
THE RESULTS The Tenant received a credit of $3,634.85 per year, or $7,269.70 for the two-year error. As the Tenant’s two-year CAM bill was approximately $16,000, the credit it received amounted to an almost 50% credit of its entire CAM bill. It is also fair to assume that if the Tenant saved about the amount per year on average for this error on the remaining years of the lease, then the Tenant will save a total of $29,078.80 over the life of the lease.
THE TAKE AWAY This example shows the savings of just one miscalculation from one lease for one Tenant, but most CAM audits reveal mistakes and miscalculations. That’s because leases are complex legal documents that are unique for each Tenant and companies with their own in-house lease administration departments just don’t have the time, personnel or expertise to thoroughly review and correctly interpret the relevant clauses of each lease. Uncovering even just one single error can save you thousands of dollars over the life of a lease.
THE SERVICE CAM Audits / Banking
THE SITUATION The client, a major financial institution, operates thousands of offices and banking centers throughout the U.S. LPRD was hired to conduct a CAM audit for the individual leases of each leased space.
THE PROBLEM The project presented challenges in complexity, size and scope. The client operates in over 5,000 locations across the country. The lease for each location contained specific, individualized language outlining the Common Area Maintenance fees which could be passed on to the Tenant. LPRD was selected to implement the CAM audits for the client’s full portfolio of leased space. Since most of those leases limited the CAM audit to the current year or even just a period of time within the current year (often 60-90 days after the CAM bill is issued), any errors discovered in the CAM audit could only be corrected for that fiscal year and for future years remaining on the lease. Thanks to LPRD’s seamless systems and well-established processes, the company had the scalability to meet the demands of this size project, while still maintaining a high level of service to existing clients.
THE SOLUTION LPRD was hired to handle the project in November, 2012. LPRD was assigned 3,995 files, amounting to 80% of their leased offices and centers. LPRD’s team of experienced auditors including - seasoned attorneys and accountants - performed a thorough desktop audit, reviewing each respective CAM bill and conducting a thorough analysis of each lease. The goal of the comprehensive analysis was to determine which CAM charges were legitimately supported by the most current lease language as Tenant charges and which expenses were – in fact -- the responsibility of the Landlord.
THE RESULTS Of the 3,995 CAM audits completed, LPRD uncovered many mistakes in the CAM charges and found that the client overpaid significantly for CAM in many of its leased spaces. In fact, LPRD identified 525 files warranting sizable recoveries for the client ranging from thousands to millions of dollars. Many other files contained smaller errors as well. Here are just a few examples: •Incorrectly applied cap for Operating Expenses:
Current year recovery: $3,998.00
Future savings for the remainder of the lease: $23,988.00
•Incorrectly applied Pro Rata Share for Operating Expenses:
Current year recovery: $37,572.77
Future savings for the remainder of the lease: $13,933.35
•Miscalculation of Pro Rata Share of real estate taxes:
Current year recovery: $123,376.41
Future savings for the remainder of the lease: $157,647.63
Thanks to LPRD identifying and correcting mistakes in its CAM charges, the client saved millions in current charges and is protected from future erroneous charges.
THE TAKE AWAY In addition to saving millions, the client recognized the need to manage its lease portfolio better. Concurrent with the CAM audit, LPRD also abstracted each of the client’s 5,000 leases, providing a clear and concise summary of the salient points in each lease. Going forward, the client will have a thorough understanding of key lease data to prevent other types of mistakes and legal issues.