Strengthening Our Due Diligence: Lessons Learned and Steps Forward
At addy, providing investors with enough information to make an informed investment decision has always been a core focus as part of our mission. As pioneers in democratizing access to institutional-grade real estate investments, we’ve learned that continuous improvement is crucial. Recent experiences, particularly with Forge and Foster, have underscored the need for a more robust and detailed approach to providing information. Here are the comprehensive steps we’ve taken to refine our platform and enhance the transparency and quality of the information we provide.
The Rise and Fall of Forge and Foster
Forge and Foster’s journey was a powerful learning experience for us. Forge and Foster grew at an unprecedented rate, leveraging themselves heavily during their buying spree. Initially, their performance was strong, showcasing impressive returns that instilled confidence in their strategy. However, the landscape shifted dramatically when interest rates increased.
Forge and Foster found themselves unprepared for the ensuing financial strain. Their inability to manage debt services during refinancing highlighted a critical vulnerability: they were unaccustomed to failure and struggled to adapt to adverse conditions. This rapid collapse underscored several key areas for improvement in the information the addy platform provides to prospective investors.
1) Understanding Project Load and Leverage
One of the first lessons learned was the importance of comprehensively understanding a company’s project load and leverage ratios. Forge and Foster’s aggressive expansion meant they had numerous ongoing projects, each adding to their financial burden. By delving deeper into the specifics of their mortgages and leverage, prospective investors can assess the sustainability of an issuer’s growth strategy.
Going forward, specifics of mortgage details will be more visible for prospective investors in the landing page and the app. Specific items to be displayed will include loan-to-value, term, interest rate, amortization, recourse, and position of security.
2) Ensuring Transparent and Honest Communication
Another critical area was communication. When issues arose, Forge and Foster became unresponsive to shareholders, maintaining a troubling silence for months. By the time the gravity of the situation became apparent, it was too late to salvage the investments. This highlighted the need for the addy software to evaluate a company’s reporting frequency, transparency, and history of honest communication.
We have now hired a new full-time real estate portfolio manager whose responsibility is investor relations for issuers and asset management for investors. This addition demonstrates our commitment to improving our system and providing superior service to our stakeholders. Furthermore, we have implemented a process where we perform a title search prior to the official closing of the issuance to ensure there is no new information that may impact the structure of the offering.
Additionally, we will conduct regular online searches to identify and report any significant news events related to the issuer or properties, and request additional information from issuers as necessary.
Regular updates and open lines of communication are now non-negotiable elements of the assessment process, ensuring that prospective investors have access to timely and accurate information.
3) Regular Communication Schedules
A regular communication schedule has been implemented as part of our new procedures to ensure issuer accountability and optimize our operational effectiveness. We will ensure each asset management task has a schedule and a reminder to remind the other party of their responsibilities. As part of this process, quarterly updates, fund requests, and annual reviews are scheduled for collection, emails are sent to issuers to remind them about due dates, and automated tasks are created for gathering and verifying information, reviewing documents, and updating mortgage terms. The software will also be developed with alert mechanisms for mortgage maturity dates and a review workflow. Staying on top of these updates ensures that issuers are adhering to their responsibilities and timelines, thereby instilling confidence in their management and operational effectiveness.
4) Investigating Management Credibility
Forge and Foster’s management issues were another red flag. Their inability to execute strategies effectively led to tenant dissatisfaction and departures, which in turn affected their financial stability. This experience taught us the importance of thoroughly investigating the credibility and track record of an issuer’s asset, property, and development managers. Understanding who they work with and ensuring these partners are reputable is now a crucial part of the information the platform provides.
In the early days, we implemented a classification system for issuers, dividing them into three categories: “Coming Up,” “Established,” and “OG.” Issuers were categorized based on their experience, assets under management, and track record. This initial iteration aimed to identify the risk profile of issuers, akin to how property strategies range from low risk to high risk—core, core plus, value-add, and opportunistic. The classification was based on historical deals with issuers, ranging from new real estate partners with senior roles but no general partner experience, to those with over 10 years of experience.
This classification is currently under review, as feedback from the addy community suggests a need for more information about issuers. Specifically, the community wants to know the property types and geographic locations the issuers typically work with.
Enhancing Our Platform’s Information
Recognizing that no due diligence process is infallible, especially with external factors like fluctuating interest rates, we’ve implemented several enhancements to fortify our platform. These enhancements include more information about the issuers from how much money they have invested in their own projects, public record court searches, documents checklist, annual title pulling, routine document requests, and signed letters of attestation from issuers. These improvements are designed to provide more transparent and comprehensive information, enabling prospective investors to conduct their own due diligence effectively. We are currently working on or have added the following procedures and processes:
1) Comprehensive Court Searches
We now perform court searches on all relevant parties to an issuance. We do not make judgments based on the results, merely surface the results without fees in the issuance data room. This helps an investor identify any legal issues or disputes that could impact the investment. By examining the legal landscape surrounding an issuer, an investor may be able to better anticipate potential challenges and mitigate risks.
2) Detailed Information Requests
Ensuring investors have all the necessary information is vital. We request as much documentation as possible to ensure a thorough evaluation. This includes items such as track record, their personal equity investments, the loan terms and if they are guaranteed by the issuers. The full list of items we request is provided in this article. By having a comprehensive understanding of an issuer’s operations, an investor can make more informed decisions.
3) Strategic Diversification
To mitigate risk, we avoid being overweight in any particular issuer without a proven track record. Diversification is the cornerstone of any investment strategy, ensuring risk is spread across various projects and issuers. This approach helps protect investors from the potential fallout of any single issuer’s failure.
4) Annual Title Checks
We conduct annual title checks to monitor for changes. Conducting annual title searches is essential for detecting new liens, mortgages, and changes in ownership. This proactive approach ensures that potential financial claims are identified and resolved promptly, safeguarding the property from legal complications and maintaining clear ownership records. Regular checks provide investors with confidence that their investments are actively monitored and protected, promoting transparency and trust in property management practices.
5) Routine Documentation Requests
As part of our annual tasks, we request documentation such as the central securities registry, proof of property tax payment, and minute books. These documents provide a clear picture of the issuer’s financial health and operational stability, allowing investors to monitor the issuer ongoing performance closely.
6) Letter of Attestation
We now require a Letter of Attestation signed by all relevant parties. This letter affirms the accuracy and completeness of the information provided, adding an extra layer of accountability. By holding issuers to this standard, we ensure that the data you base your decisions on is reliable and truthful.
Empowering Everyday Canadians
When we started addy in 2018, our goal was to break industry norms by enabling access to institutional-grade real estate investments that were historically reserved for high-net-worth individuals. We’ve always believed that everyone should have the opportunity to invest in premium real estate, regardless of their financial background.
Our platform strives to provide as much data as possible on investment opportunities from issuers, empowering everyday Canadians to make informed investment decisions. A core value at addy is curiosity: everyday we are better and better and better. So we know a lot more about the process and what information to provide at property 44 than we did at property 1. As we continue to grow, our pattern recognition improves, allowing us to better identify what’s important to review when considering an investment opportunity. By the time we reach property 100, 1,000, and beyond, our due diligence process will be even more refined and robust.
Know Your Risk Tolerance
For those uncomfortable with the high-risk, high-return profile of equity investing, we are introducing a new product offering. Soon, you will have the opportunity to review investment offerings on the credit side and invest in a secured position with a lower risk, lower return profile. This diversification of investment options ensures that we can cater to a broader range of risk appetites, providing safer investment opportunities without compromising on the quality of returns.
Commitment to Innovation and Community Feedback
At addy, innovation and community feedback are at the heart of everything we do. We love building software and breaking down barriers to entry, constantly seeking ways to improve our platform and processes. We value any and all feedback from our community, as it helps us become better every day. Our core value is win-win or no deal, and we truly live by it. We believe that success should be shared and that all parties involved should have a stake in the game.
Through these enhancements, we aim to create a more resilient and transparent due diligence process for investors to make informed investment decisions. By learning from past experiences, we are better equipped to identify potential risks and ensure investors have the information they need. Your trust is our priority, and we are committed to continuously improving our practices so that you can make real estate investment decisions in the same way you decide to invest in a stock.
Together we go far,
Mike
CEO & Co-Founder