Real Estate and Construction Case Studies
Acquisition due diligence saves millions at the last minute
Institutional real estate investors regularly call on AGH to perform due diligence prior to making an investment. AGH has performed due diligence procedures on projects ranging from $25 million to $250 million. Recently, a client about to close on the purchase of a $100 million shopping center project received substantial benefits far outweighing the cost of our services. During the 30-day window for due diligence, when we compared seller records to lease agreements, we discovered that the seller had inadvertently overstated the project’s rental income in their cash flow model. As a result of this discovery, our client was able to negotiate a lower purchase price.
Recovering construction costs
An institutional real estate investor asked AGH to conduct a post construction examination for a $75 million real estate project in which they were an equity partner. The study focused on recovering excess construction costs from the client’s former partner in charge of property development. We helped the client narrow their list of items needing to be reviewed and met with the property developer to begin testing. Ultimately, we identified accounting errors associated with how the developer allocated costs between multiple projects, which enabled our client to recover substantial dollars that would have otherwise been lost.
Landlord Side CAM Audit Increases Cash Flow
A long-time institutional real estate client asked us to audit the recoverable operating expense schedules for a portfolio of office buildings that incur $30 million annually in recoverable expenses. We reviewed the properties’ lease agreements and worked closely with the property manager to be sure that all potential expenses were included for recovery purposes. More significantly, we analyzed the property manager’s assumptions and calculations in allocating and grossing-up the shared costs associated with the central HVAC plant, parking garage, restaurant facility and general property maintenance. AGH was able to provide our client with comfort that the property manager’s allocation and gross-up calculations were based on sound assumptions and in line with common industry practice, but more importantly, we were able to increase the properties’ cash flow by generating additional CAM revenue.
Studying Percentage Rent Helps Landlord Boost NOI
The owner of a 500,000 square foot retail real estate project asked AGH to review percentage rent income reported by a tenant. We assisted the client in reviewing the reported sales by requesting the underlying documentation from the tenant. We first discovered the tenant’s annual gross sales report was not certified by an accounting firm as required by the lease agreement. We then examined a large sample of daily sales tickets and noted that the gross sales appeared to be understated on the annual report submitted to the landlord. As the result of the audit, our client negotiated a back rent payment from the tenant and increased cash flow.
It’s not what you have… it’s the way that you have it
An apartment developer client came to AGH with a question of how to best allocate development costs for a new project. AGH worked to structure the transaction to help the client reach their long term investment goals AND their short term sales goals. In the end, our suggestions helped the client meet their business strategy of limiting taxes due from future sales.
Defer the tax to the max through a tax-free exchange
An investor client was about to sell a hotel for a substantial gain, creating a large capital gain tax liability. To help this group preserve its profit, AGH advised them to consider a tax-free exchange, which allows capital gain taxes to be deferred if another income-generating property is purchased within a specific timeframe. The investors decided to buy an apartment building, which not only deferred taxes but allowed them to deploy all of the investment capital to purchase another appreciating asset.