Nov 11, 2015

Breaking down the OM

Want to make this thread a kind of "best practices" for reviewing OMs efficiently and effectively. What is your process and what are some things you think are important to focus on? Are there sections you ignore entirely due to broker fluff?

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4 Comments

RE

8y

Best Response

Determine the IRR you're looking for. What's discount rate are you using and why? Is this a core. value add, or opportunistic play?
Plug Reimbursable expenses into argus (using actuals from OM) with a conservative general inflation rate
Plug rent roll into Argus (actuals from OM)
Call 3 third party brokers and get their take on MLA's and vacant space lease up projections. Average them. Also determine if the current reimbursables are correct, can you get more form the tenant?
Dig into the cap ex, cap reserves necessary to keep building up to snuff. Tour the building. Plug in to Argus
Dig into tenant financials if you have the access. Is there any legitimate credit risk associated with these leases? Be conservative and don't take the broker's/owner's word for it.
Call 3 banks and get rate quotes for the type of asset and determine ltv, rate, term, dscr. Or distribute to your mortgage broker
Look for value add opportunities (miscellaneous revenues etc)
Create your own DCF and determine After Debt Cash Flow and get the present value. Determine if IRR is in the ballpark that you're looking for.

Other's thoughts?

Authored by: Certified Real Estate Professional - 3rd+ Year AnalystCertified Real Estate Pro

AM

8y

the text that is the buried is often the most important

RE

8y

I completely ignore broker proformas. Most of them are hilarious. I only read them to get a good laugh. I also generally ignore anything market related. The reason is that if you are buying a property in a certain market, you should know about that market and dont need a broker explaining it to you. I only care about historicals and comp set. Regarding comp set, you'll need to do your own due diligence on this as well. For example, I have seen OMs for class B properties with like $1000 rent per 1 bedroom unit and then the comp set is at like $2000 per unit. When you delve in deep you see the comp set are all high end class properties with way more amenities. Use the OM as a starting tool and just that.

Array

I quit this site because of censorship

O

8y

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