Guys,
I'm curious to see how much diligence teams complete prior to submitting a bid.
Sometimes with the limited availability of information provided by brokers prior to submitting first round bids, I'm finding it hard to actually take a deep dive into some assets which are on the market.
How does your team analyze a deal prior to submitting a first bid? Is it just that the senior team members know exactly what they will be willing to pay for an asset, and minimal work is completed prior to submitting an LOI? Then is the majority of your analysis done once under contract?
What kind of diligence / analysis have you been asked to complete prior to submitting an LOI? Is it primarily market research?
Nessy
Are you asking for development or existing buildings?
If development well - everyone is different. We are pretty aggressive and can actually get a lot done up front for free. That includes zoning review, reviewing use and development requirements, talking to my civil engineer, sketching out a site plan, conceptually understanding horizontal cuts and fills and utility connection points. The biggest one is walking into the City with a site plan and sitting down with a planner. Sometimes those planners don't shut up, other times they act like they are the President of Mars and you are scum of the Earth. And we may or may not mitigate all the issues (via offer price) we find and can use in our arsenal for a re-trade, just depends on the strategy.
Was asking more about pre-existing buildings, but appreciate the insight on development!
If any other monkeys could chime in, would love to get some feedback.
Bump
We do a significant amount. When speaking about office, we will get the Argus with the OM. Compare that to the rent roll, turn down the assumptions, we will generally then get a hold of a local leasing team through some kind of connection. During these calls we'll discuss some existing questions that we have or items/statements we believe sales brokers are spinning as a positive in an attempt to drive pricing. Local teams are extremely valuable if you can get a hold of them. We get info like where the property sits within the market, any large tenants in the market (maybe even at prospective building), story of current ownership (why they were successful or why they weren't). Then we will tour the asset to get a sense of capex etc.
Thanks - very helpful. Seems we do ours in a similar way.
I'm curious if you guys have a templated request list that you rip through for each deal you are underwriting. Our team is very entrepreneurial and lean, so we don't have one (yet). We typically ask for most recent third party reports, any agreements, pricing guidance and if there is assumable debt on the deal. After that we will determine what else needs to be requested.
Depends on the size of the deal and how much information the seller has. If it’s a larger deal marketed by a good brokerage team that has renovated/non-renovated units parsed out, a t12, utility bills, capex spending etc. then we’re going to get pretty close to doing everything we need to pre-LOI and Dd will be mostly confirmatory outside of 3rd party reports. If the seller hired a no name broker and all they have is a rent roll were going to make a lot of, hopefully, educated assumptions and refine our underwriting once we get more information
edit: this is multifamily in case that wasn’t clear.
Also, to add, if there is a deal where the property had been previously gone under LOI and the DD substantially gathered, they often give more access to information up front. I've seen that a couple times on the deals that I have worked on. Also may depend on the seller, if the seller is institutional they typically have well organized docs they can deliver. All of this is deal dependent though as you mentioned.
Haha I figured by the username.
How hard do you push for items if a seller isn't willing to provide it. I find in very select instances, some sellers are now withholding information and asking interested buyers to still put in LOIs regardless, indicating further details will be shared during due diligence. Does your team still put in an LOI in that instance (if it has happened) or do you just walk and wait for the next deal.
bare minimum is a rent roll and financial statements (though these are sometimes worthless). Most of the risk around deals in my opinion are around expenses and deferred maintenance. We can underwrite rents pretty well by ourselves. We will certainly put in an LOI in the situation described, but we make sure the seller/broker knows that it's worth about as much as the paper it's written on and the price could move substantially.
It varies widely: sometimes we spend weeks talking to lenders and sneaking contractors onsite, other times we literally take something off the market a few hours after hearing about it if the basis is that crazy.
I’m interning as an analyst for a REPE firm that focuses in one asset class within CRE. I’ve been doing acquisitions for about a year.
Pre-LOI what we usually do is look at the rent roll and the tenancy. We try to understand who the tenants are, if we think they would be willing to extend their lease terms (in case of low WALT). We then model our Pro-Forma based on the rent roll and what we think we could get the rent roll to look like upon closing (perhaps signing brand new leases at closing). We use conservative assumptions based on location, asset age, size, etc. and debt terms that were used to getting for deals of that size. We also use broker-provided sale and lease comps, as well as comps from past deals and Costar comps to evaluate whether we are at market or not, and how to stay competitive. Of course if there are additional resources available to us at that point in time we will make sure to take advantage as we model our returns, but it’s not always the case.
Once we sign LOI we’re hoping that the broker will be forwarding us over as many due diligence items as possible so we can get started on the DD phase before we even get the LOI executed (buys us time). However sometimes you can expect to only really receive the bulk of DD materials post LOI execution, either during PSA negotiation or once PSA is executed and the soft deposit is in.
Can you explain deposits? Are they usually fully refundable?
It depends on when the buyer pulls out of the acquisition. This is the timeline:
It's also worth noting that sometimes, the buyer can receive part or all of their hard deposit back from the seller even though it's after the DD period in order to maintain amicable relationships with the buyer. But that's at the discretion of the seller.
And of course, the deposit amount goes toward the total purchase price of the asset.
This is a pretty interesting question for the forum, props. Prior to getting control--fairly little. For development deals, we will likely do a preliminary underwrite to include rents proxied off comp data from immediately proximate neighbors, and the rest is a total SWAG based on what we know about hard costs, density, OPEX, and other soft costs.
The development business is largely about time management. For every 10 LOIs we submit (either solicited or unsolicited), we may get 2 responses. So, for a highly marketed deal or a cold unsolicited reach-out it is not worth spending hours on an underwrite that may get thrown in the garbage--45 min is plenty. If we get a second look, we will likely get a concept site plan done, get a GC to ballpark the hard costs, and take a closer look at big drivers like taxes, permit/impact fees, comparable unit mixes, etc. It's generally not until we get a signed LOI/PSA that we spend real money/time on DD with ESAs, zoning memo, tax report, geotech, civil DD report, etc.
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