What is Financial Due Diligence? - Multifamily Commercial Real Estate Development
With Percy Nikora, Co-Founder
Then, when you look into the financial due diligence, typically, you ask for what's called a T12, or the previous 12 months' operating books of the profit and loss statements, cash flow statements. We go through the actual T12, not what the broker is giving us, or not what the seller may have advertised, initially. We look at the actual T12.
One of the steps we take is we try to then track that or trace that to the bank deposits that they have made. We take an extra step, and say, "Hey, okay, you're telling me that this is the revenue that came in, and these were the expenses. Can you prove to me that this was the actual revenue that came in and was deposited into the- cash that came in was deposited to the bank?" We try to trace that; make sure- validate the statements a little bit.
Then, we do our underwriting. We have our own financial model that we've built over the last several years. We stress test the projections based on certain assumptions. So, we look at what would be the break-even occupancy of the property. What's the cap rate, when we are looking to sell the property? We generally increase the cap rate, which means we assume that the market's going to be softer when we sell it. We stress test it at multiple levels to see how much of a downturn we can sustain in the market while still giving a good return to our investors.
Then, we obviously do some forecasting and stress testing around refinancing, as well; like, if we had to extend the refinancing period for a while, or if we get a different interest rate than what we're anticipating, et cetera. Once it passes those key assumptions and metrics that we have, then we go a step further. We put an LOI out, which is a letter of intent. We generally do some-
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