The Value of Thoughtful Due Diligence with 1031 Exchanges and Opportunity Zone Investments

Written by Nathan Kuhn July 29, 2019

For investors considering a 1031 Exchange or Opportunity Zone (OZ) investment, thorough and thoughtful due diligence has probably never been more important than it is today. With 1031 Exchanges (and especially DSTs) along with OZ investments growing in popularity, the industry is seeing a lot of new offerings as well as new sponsors entering the space.

On one hand, an increase in the number of offerings means more choice, which is generally a good thing for investors. On the other hand, more choice means more investments to evaluate, and in addition, new sponsors entering the space requires evaluation at a firm level as well.

That’s why we be we believe our firm’s thorough due diligence process is important for investors looking to complete a 1031 Exchange or Opportunity Zone investment. Our firm’s perspective is that there are three key areas that must be evaluated: people, process and property. Let’s look at each one individually.

People

With our broker dealer, DAI Securities, the due diligence team assess the principals and all other key players involved in an offering. They will take into consideration their experience at the current firm, previous experience in the industry and regulatory history. They also look for individuals and teams that have a history of favorable returns and a philosophy of always putting investors’ interests first.

Process

Our due diligence team then evaluates the process a firm goes through to take an offering from purchase to operation to eventual disposition. They want to understand the process used to evaluate potential opportunities. For example, what parameters, metrics and assumptions is the firm using.

They will also explore how the firm intends to manage the opportunity during its life cycle. It is impossible to know exactly what the future will hold when evaluating an offering that may have an expected long-term investment horizon, however, it is still important to have a strategy in place that leads toward the eventual successful disposition of an asset.

Experience truly matters in this area. Many of the firms that we work with, we have had relationships with for a long time. That has given us the opportunity to go through the entire process on multiple occasions.

Property

Every investment opportunity is different, and our due diligence team spends a great amount of time evaluating the property(s) in a deal. They want to know the reasons why the sponsoring firm believes it is a good investment and they look for insight as to what potential broad market and specific risks that the property may have. They spend time evaluating the demographics in the area of the property as well as the assumptions being made by the sponsor firm.

While no amount of due diligence can eliminate risk, we invest firm resources—time, capital, and man-hours—to ensure our process is both comprehensive and effective. In the long run, we believe this approach will serve our firm, our industry, and, most importantly, our clients well.

For more information, please feel free to contact our team.

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