Real Estate can be a Complicated Business

Written by Joe Stampone |http://astudentoftherealestategame.com/

“Real estate is not an overly complicated business” is a common sentiment I hear. Historically, that was true. Real estate was a business made up of small local players who financed properties through local bank relationships and raised equity from the neighborhood doctor or attorney, but as the business became institutionalized, it’s become increasingly complex.

By way of example, my company was just awarded a new deal and I was thinking about all the complexities of the transaction.

Winning the Deal: The property was being sold by a public REIT which valued surety of close over getting the best price possible. In order to get the seller comfortable working with a relatively new group, we did a ton of upfront diligence on the property, market, leasing environment, and financing options, which gave us a leg up on the competition. We retained a best in class mortgage brokerage shop to help with the financing, decided to keep the same leasing and property management team in place, and conservatively underwrote upfront and annual capital reserves to mitigate any surprises we uncover during our due diligence.

Simultaneously, we were working an internal contact we had at the seller’s firm to put in a good word for us. All this upfront effort was critical to winning the deal and beating out two other groups that were willing to pay as much or even a little more than us.

Financing Options: Upon winning the deal we had an internal kick-off call to discuss due diligence, raising equity, and financing options. In our initial conversation we discussed the pros and cons of bank, Life Company, and CMBS debt and the key points of fixed long-term off the bat or going with a flexible bridge with refinance shortly thereafter. Each financing option has its upside and risks, and while there is no right answer, we’ll do a comprehensive review to determine what is right for this deal. This requires a deep understanding if the various financing options.

Value-Add: One of the great things about real estate is the opportunity to add value at the property level. On this deal, the REIT’s in-house management team was located about an hour away and was not in-tuned to the sub-market. Therefore, the property was 70% leased in what has traditionally been a 90% occupied market. We brought in a young, hungry broker who specializes in this market and knows every tenant in the area.

Other: There a countless other things that go into executing a successful deal including pitching investors of the merits of the investment opportunity, negotiating with potential tenants and renewing leases (TI packages and pricing), and improving the physical asset.

The point is that real estate has evolved from a business made up of mom and pop operators to an institutional asset class made up of sophisticated investment professionals. So if you’re looking to compete in today’s real estate business, learn more than the macro story, pick up textbook and learn the intricacies and nuances of the business.

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