Sometimes You Just Have to Walk Away
Putting The Critical Elements in Place
There are many complex and moving parts to developing a promising project that meets all our objectives. From identifying a site, then through extensive research and due diligence, finishing off with full funding. One of the more challenging aspects is knowing when to walk away from a project, especially the ones that stimulate the senses and get your blood going, the ones screaming with potential and promise.
We started working on a project in a major city that had us all excited, both the Loewen Capital team and our investors. This was a commercial office property in a spectacular area downtown, with all the right elements going on. We invested about a month doing our due diligence, spending hard dollars on attorneys, doing background work, and it was all lining up. It was time to go boots on the ground, so we got on a plane to walk the site and meet with the partners personally.
We spent the day discussing the deal with the owner. We talked about how we were going to invest, we walked the property and had the property inspected, and signed the terms of agreement. Investors were lined up and ready to go so we shook hands and headed back to Phoenix to put everything in motion.
Within 48 hours we get emails and phone calls from the owner. Now he’s not sure what they want to do, perhaps they want to go in a different direction. Wait…hold the phone, they were on board when we were there but now they are shifting. He seemed to want to undo everything we had been working on for a month, had shook hands and signed on.
We liked the project, and the asset location was unbelievable. It was incredible, the kind of project you just don’t come across very often. This was a project we wanted to see come to fruition and so did our investors.
But we had to take a step back and look at this objectively. Our concern was, how does someone spend 5 hours with you, sign off on the terms, look you in the eyes and shake hands and then start backing away? We weren’t even partners yet, is this someone we wanted to be in bed with for the next 36 months? Red Flag! Some people might go ahead with the project saying, “we’ll have controlling interest and just play hard ball with them if we have to”.
But we do things a little differently at Loewen Capital. This was already a headache and a half. I didn’t think I wanted to deal with this level of unpredictability for the next few years. The writing was already on the wall, it was going sideways before it began.
The investors were trusting and understood the level of research that had been done. One of the investors stated the common sentiment when he said, “I’m doing this project because you loved it and you gave me the reasons why, but if you walk from it and give me all the reasons why, then I’m with you until you find the right one. I trust you to find the good ones and I trust you to walk away from the bad ones”. In the end, the pain of being in a bad project far outweighs the joy of a great return.
Different Dynamics Same Result
We had another project in a vibrant and growing community, with tremendous upside potential. We were talking to some institutional investors that we had known for quite a while. These were heavy hitters with hundreds of millions in real estate with large scale funds. They do heavy due diligence and their background and records were great. The people were incredibly qualified, and we loved the area.
Again, we spent about a month doing our homework. When we got done spending the hard dollars on attorneys, inspections, and reports, we flew into town to walk the project. The building was on the fringes, but it looked to be in the path of growth. The question was whether that growth would be in 2 years or more like 7 years.
Everything looked good until I got eyes on it and reconfirmed the condition of the building, the position on the lot, and the amount of good available parking. I noticed some haphazard construction details and shortcuts, from the previous owner. I interviewed nearly all the current tenants. It looked as though to get tenants in, the owners had thrown up makeshift walls to make it look cosmetically better. We had planned on doing some construction work, but it was looking more extensive than what we wanted.
We drove around the area to get a feel for future growth and re-examined the construction budget. It was looking like the numbers added up much better on paper than what reality would be. Our investors had been excited for this one and had their capital committed to us, ready to roll. We had to take a hard look at the opportunity cost on this one. The analysis underwrote a 40% return on the investment opportunity for a 36-month hold period. This was looking more like 48 months or more. An additional year without additional profit would greatly reduce the overall returns.
It’s my job to find and secure the best opportunities out there. If I don’t love the project, the people, and the numbers supporting it, it’s not going to find its way into our portfolio. I won’t put investors into a deal that I’m not comfortable being in myself. I’ve got skin in the game. I invest alongside my investors. That is what it means to be an investment family.