Question for Acquisition Guys
What are the first 5 things you immediately begin digging into when you get an Argus file from a broker for a potential acquisition? I recently started an acquisitions role for a smaller group with no real underwriting policies and procedures or manual. I have a little bit of acquisitions experience, but the bulk of my experience has been on the construction lending side. Appreciate any insight. Thanks.
Ranked in terms of importance:
-Check the MLAs and see which ones are being applied to each lease
-Check the lease up of vacant space to see how aggressive the broker was
-Check the RR against Argus to make sure the lease inputs are correct
-Check the opex numbers to see if they gut check, and the expense categories/recovery structures to see if recoveries are over/understated
-Check all the miscellaneous stuff like vacancy / credit allowance, other income, and inflation (this stuff is all pretty standard)
This. Also see what CapEx, if any, is being underwritten (whether it's reserves or actual projects) because a broker would likely understate them.
Thanks guys, very helpful. Please feel free to add any other critical steps. Much appreciated.
I'm beating a dead horse by expressing my utter contempt for the broker world, but these people are so transparently unethical that you can literally trust them about nothing. To your point, you'll see a rent roll with every tenant in the range of 2.5-3% annual rent increase and the broker will throw in 3.3% (which makes a HUGE differences in valuation). I get it--caveat emptor, but come on, man--have you no pride in your work?
Dude, you deal with some terrible brokers.
stop buying shit from Marcus and Millichap
Inflation rates within certain line items.
Not talking global inflation rules; but I have seen within certain expenses or misc revenues (where you can manually adjust the inflation for specific line items), switched to 1% for a major reoccurring expense as well as 4-5% for misc revenues..
Basically you have to check everything.
Seconded, it seems like they all try to pull this shit with the matrices. e.g. instead of plugging 3 months free rent, setting it to 3 for the first two years, then down to 2, 1, and none by year five.
Appreciate the feedback. Thanks.
I do agree with the above posts that there's a basic checkbox you run down - but that shouldn't take more than 30min to an hour. For me, if it's an analyst I've never dealt with or a company we haven't done a transaction with, I need to get comfortable with how they are using Argus. Despite it being a relatively level modelling tool, there are many ways to approach a single question.
In the end, I always pull out the ol' HP and back check it. Many analysts don't do this and get caught big time. A common theme I will see if people double counting rent growth by applying rent escalators in the MLA as well as the overall assumptions, or vice versa (not growing MLA rents and assuming that MLA $/SF now will be the same price in 7 years).
My point is there are a lot of little fine tuning parts of Argus you need to make sure are being used correctly and not incorrectly inflating/deflating rents. Again my experience has been that the most common overlooks are on the application of MLA's and growth rates.
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