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 SITUATION The Client, a manager of a portfolio of properties which are primarily office or mixed-use office and retail, hired LPRD to prepare the annual CAM reconciliations for their tenants.
THE PROBLEM In preparing the annual reconciliations, LPRD reviewed the CAM provisions in the leases and compared the lease information to the methodology the Client used in its prior year reconciliations. LPRD noted several instances where the Client was under-billing the Tenant. In two instances the Client’s reconciliations did not pass through certain allocated expenses to the Office and Retail Tenants, respectively, that could have been recovered based on the lease language for most of the tenants. In a third case, expenses allocated between the Office and Retail portions of the Building were passed through using the wrong denominator for the tenants’ shares of the expenses.
THE RESULTS The resulting additional income recovered based on LPRD’s corrections was $23,600 for 2020, $24,800 for 2021, and $22,000 for 2022 with the additional income continuing in future years as well. When LPRD made the Client aware that they had been significantly under-billing the tenants, the Client responded: Good thing we hired LeaseProbe then, huh? Let’s get it right starting now.
THE SITUATION The Owner of a small 7-tenant retail center hired LPRD to prepare annual Reconciliations for the tenants.
THE PROBLEM In preparing the annual reconciliations, LPRD methodically examined each tenant’s reimbursement responsibility as provided in the leases. LPRD also reviewed the methodology the Client used in its prior year reconciliations. LPRD determined that the Client was under-billing some of the Tenants by omitting the administrative fee even though the leases allow for it.
THE RESULTS By merely including the administrative fees, LPRD calculated additional recovery income amounting to approximately $2,200 annually. This more than covered the LPRD fee. And, of course, this increased income is on-going.
FINDING 1 Property Management was unable to separate the time maintenance people spend cleaning the common areas of the Property and responding to specific tenant work orders. One of the retail tenants “audited” the 2018 Recs and pointed this out, so Management removed the expense entirely from the NNN’s passed through to ALL the tenants. Maintenance salaries should have been included in the Office Tenants’ CAM Pools.

Following this finding, in 2020 and 2021 maintenance salaries were passed through to Office Tenants. And, as of 2022, Mgmt. was able to break down the maintenance salary cost, and a portion was also allocated to the Retail Tenants.
FINDING 2 The CAM definition in the Office leases includes “costs of Janitorial Services”. The lease also notes Landlord should furnish Janitorial Services to the Premises; however, the Cleaning – Contract Service expense, Janitorial Supplies and Day Porter expenses were not passed through in the 2019 reconciliation.

Mgmt. was surprised to find out that these expenses had not been passed through to the Office Tenants and confirmed that they should be. LPRD corrected this omission beginning with the 2020 Reconciliations.
FINDING 3 The 2019 reconciliations allocated Repair and Maintenance and Trash Removal expenses to Retail and Office Tenants based on the retail/office percentage of the Building; however, the total Building area was being used as the pro rata share denominator, the same as for other Project expenses for which no allocation was done (Security, Management Fees, Electricity (Parking lot lights), Water, Sprinklers and Landscaping). This resulted in lower recoveries than if the denominator used for the allocated expense was only the retail or office area.

Additionally, for expenses which were only passed through to the Office Tenants the denominator used was also the total Building area, which resulted in a portion of these expenses not being reimbursed at all.