Due diligence is the analysis of the facts and circumstances associated with an investment to provide an investor with full disclosure of facts and risks to make an investment decision. The graphic below shows the three steps that are typical of the process.
The next graphic shows the four layers of due diligence responsibility. The sponsor, the lender and legal counsel are responsible for the first three layers. We are responsible for the fourth.
After an offering is initiated by the sponsor and approved by the lender and legal counsel, our full-time analysts examine five key components:
- Sponsor – the real estate provider
- The actual properties
- The market
- The program structure
- Its 1031 tax compliance
The analysts present their finding to our investment committee. Each committee member has many years of commercial real estate experience and 1031 Exchange marketplace expertise.
We reject a significant percentage of presented offerings based on the property itself, the sponsor, the financing or the market – despite the fact the lender and the legal counsel have all approved the offering. This means that offerings we reject may be available through other brokers.
It is important that you feel comfortable with our standards and how they align with your approach. We have a conservative approach.
Private Placement Memorandum
Because Fortitude’s real estate offerings are private placements regulated by the federal government under the 1933 Securities Act, the sponsor retains a law firm to write a Private Placement Memorandum (PPM).
The PPM contains a detailed description of the property, the sponsor, the financial details of the investment, the projected return on the investment and the specifics of the DST or TIC structure. It also contains third-party due diligence reports, all pertinent leases, agreements, contracts and a legal opinion – as well as a detailed discussion of general and specific risks associated with the investment. You may not get these are benefits when purchasing non-securitized real estate on your own unless you pay for them yourself.
The law firm must also perform due diligence on disclosures made in the PPM to ensure they are complete, accurate and not misleading. A law firm is also retained to issue a legal opinion published within the PPM on whether the offering as structured will meet the provisions for Revenue Ruling 2004-86 or Revenue Procedure 2002-22 and qualify for 1031 Exchange treatment.
Fortitude and the Real Estate Investment Securities Association require a “should” level opinion for an offering to be acceptable. Regulation D of the 1933 Securities Act requires that each accredited investor must be provided with the PPM in advance of making a decision to invest in a specific offering.