Most Complex Real Estate Investment Strategies
As stated, what type of real estate investment requires the most sophisticated financial analysis? Is it real estate debt or equity?
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Equity, about as complicated as it gets if you want to get really crazy in the model is later on construction loan to 1st mortgage refi, structured mezz, structured pref, LP gp split to round out the capital stack with a combo irr and EMx hurdles. And then toss this all on top of say a condo/office development. End of the day debt investors typically won’t care what goes on below gross levered cash flows, but equity needs to fully model out what the debt is doing so they’re technically doing both the job of the debt and equity.
But end of the day complicated is not good, it’s real estate just keep it simple. Simple is nice and clean, and clean is good.
This. Anything the junior members in the capital stack (debt/mezz/pref) have to underwrite, the equity investors have to underwrite as well. They just have to do it in a much more complex way. I've done some mezz deals and it's basically just stressing a T-12 and seeing how bad things have to get before you come too close for comfort in default.
If you're a GP, with a GP co-investor, a JV investor, a Mezz piece and a senior lender - your life is fucking MISERY from a legal perspective alone. Never-mind getting capital expense estimates for different reno projects, construction curves and draw timelines, multiple promote waterfalls, building the possibility of PIK interest accruals into the model for the Mezz piece, having to actually build your OpEx budget from really creating a staffing plan versus just stressing the T-12, etc. If you're a good developer or hands on operator, your OpEx schedule isn't just going to be rough estimates or a T-12 carry-over, you'll need to get an in-depth understanding of how many of each type of staff member you'll need, what existing capital needs to go into each of the 100-500 units at the property, what needs to be done on the exteriors, the timing to complete these capital projects. If you can't renovate while the tenant is in their property and they wish to renew - when should you assume on average you'll be able to upgrade the units that need it? How does that effect the way you model the CapEx needed at the property? If there's a possibility that a tenant might stay in place for three years, does it make sense to model it as an up-front project cost or should you assume down the line an additional capital call will be needed vs. taking out operating cash flow? Then when is comes to refinancing that's a whole new headache, especially depending what type of prepayment penalties exist for all of the debt, buy/sell rights your investors may have, etc.
I've worked in IB and honestly most vanilla capital markets deals are a BREEZE compared to a GP RE deal underwriting from a DD, legal, modeling, regulatory and structuring perspective. M&A deals are tougher depending on the types of accounting the clients use but people definitely underestimate how sophisticated some RE deals can be. What makes it particularly difficult is that IB deal teams typically just focus on Powerpoint and Excel whereas a lot of Developers/Operators have their deal team getting their hands dirty on every aspect of the process.
House Flipping
REOC investing
Who are the most respected names in this space?
Alpine Grove, Calzada, Tripost, Partners Enterprise Capital, Evergreen, and Equity International are a few of the players who I think highly of. There are many others, but many of these like to fly under the radar.
To echo one of the comments below - if you have to engage in the kind of financial engineering that could be called "sophisticated financial analysis," you probably shouldn't be doing the deal (with some exceptions, like if you have no equity exposure, etc).
Buy and hold
Interestlying enough, my experience at multiple firms has been that debt investing leads to more complicated scenarios and analysis. You would think it would be the other way around, but I've found whenever working on debt deals, we need to run 10 scenarios each way the deal might go. While the equity teams run it 3 ways - upside, base case, downside. On top of that, you find many VPs in debt funds etc. try to prove their worth by coming up with asinine structures to potentially offer the borrower two things: A) differentiate your quote and B) juice your own returns slightly due to structure. This has lead to annoyance and time consuming efforts to underwrite deals from the debt side, which honestly, in my humble opinion are simple - am I comfortable with either the asset/business plan, or the credit and will I get repaid. If I think I'll get repaid, great, am I comfortable with my basis. If I don't like my basis, don't do the deal. But unfortunately, we are all clamoring for the same deals and it's a race to the bottom. I've found equity to be a much easier process. Also, generally if you are chasing fully marketing equity and debt deals, the equity side of the business moves slower as fully marketed deals have 4-6 weeks to underwrite (usually). On the debt side, you need to provide a hard quote in 7-10 days, and there is more volume, so although you don't get as in the weeds, there is just more deal flow.
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Typically easier from the real estate perspective, more difficult from the financing structure and fact that it would involve operating a business. I'd say a lot of the platform investment/purchases are very predicated on basis, if you can buy something that's trading below private market basis on individual asset level then you're good to go. May toss on a 2-3% growth rate on NOI, sensitize occupancy and call it a day. But once you have to get into all the balance sheet modeling and possible financing structures and then the fact you now need to figure out what you're going to do with this entire operating company then it gets a bit more complex.
Really if you're going to go take private a reit not many people will take the time to model out each individual asset on the front end, you'll look at public market price and say I can buy this whole company for $80 psf on its asset and I can turn around and sell these for $100 psf in the private markets.
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What do you mean by OpCos? PM?
Investing in homebuilders / developers is probably up there?
Deciding who gets to keep the Hamptons house in a messy divorce – trophy wife vs. husband who got caught with his 25 year old gf. Lol.
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