Three Deals That Looked Perfect on Paper
$1.2M in hidden capex taught me to stop trusting decks
Three deals. $1.2M in hidden capex. All looked perfect on paper.
I almost wired money on every single one. The decks were clean. The pro formas were tight. The sponsors were confident. Everything a passive investor wants to see.
But I walked the buildings.
Most passive investors never do. They wire money based on a deck, a pro forma, and a sponsor’s word. And I get it. You’re busy. You hired a sponsor to handle this. But those three deals changed how I invest forever.
The first one had a pro forma that said “stable operations.” I walked the roof. Fifteen years of deferred maintenance. $200,000 in capex that wasn’t in the budget. Not a line item. Not a footnote. Nowhere. I killed it.
The second one had a deck that said “strong tenant base.” I walked the hallways. Half the units had maintenance requests taped to doors. That’s not a strong tenant base. That’s a turnover spike waiting to happen. I killed it.
The third one had a sponsor who said “minor cosmetic updates needed.” I walked the mechanical room. The boiler was 28 years old. That’s not a cosmetic update. That’s a ticking time bomb. I killed it.
The Reality: The paper tells you what someone wants you to believe. The building tells you what’s actually true.
But here’s what most investors miss. It’s not just that these deals had problems. Every building has problems. It’s that the problems were invisible to anyone who didn’t physically walk the asset. The decks were professionally designed. The pro formas were mathematically sound. The sponsors were experienced. And none of that mattered because the buildings told a completely different story.
Sponsors have incentives to close deals. That’s not cynicism. That’s how the business works. They earn fees on acquisition. They earn fees on management. The faster they close, the faster they get paid.
Buildings have physics that don’t care about incentives. A 28-year-old boiler doesn’t care about your projected IRR. A roof with fifteen years of deferred maintenance doesn’t care about your investor deck. Water intrusion doesn’t wait for your capital call.
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That’s why I ask three questions before every deal now. I ask the sponsor to show me their inspection notes. Not a summary. The actual notes. I ask what they found that concerned them. If the answer is “nothing,” that concerns me more than anything. And I ask the age of every major system. Roof, HVAC, boiler, plumbing. Because age is the one thing a pro forma can’t hide.
Even with all three questions, you can’t catch everything. Surprises happen. But the difference between a disciplined investor and a hopeful one isn’t perfection. It’s whether you asked at all.
The Bottom Line: The building always tells you the truth. The deck tells you what someone wants you to hear. Most investors underwrite presentations. You’re learning to underwrite buildings. That’s the difference between trusting a deal and understanding one.
When’s the last time you asked your sponsor what concerned them about the asset?
If you want to see how we evaluate physical risk before writing a check, I’m happy to walk you through our process.
Cheers,
Jon
P.S. Three deals. $1.2M in capex I never had to pay. The best investment I ever made was a pair of boots and an hour on each roof.