Maximizing revenues and minimizing risks when buying and managing real estate in 2009

Risk is an unavoidable element in all commercial real estate investments, but in today's challenging economy, property owners and managers are understandably eager to minimize their exposure to risk while maximizing the return on their investments. In order to attain these goals in the coming year, investors should consider utilizing specialized strategies in the acquisition of property or notes, as well as in the management of their existing real estate portfolios. When acquiring real property, the primary task is to gain a clear financial picture of the asset, uncovering any current or potential trouble spots. This is accomplished with a comprehensive financial due diligence review, leaving no stone unturned. A thorough analysis of all relevant documentation should include income and expense verification, CAM reconciliation and validation, financial modeling/cash flow analysis, and IRR analysis of leveraged and non-leveraged returns. Armed with this data, investors are far better qualified to negotiate from a position of strength in order to strike their most advantageous deal. Similarly, investors looking to acquire a note or assume a loan would also benefit from due diligence services. In this process, the first step would be to organize and abstract the loan documents, so as to ensure a clear understanding of the obligations and responsibilities of all parties. Next, a financial review on the underlying property should be conducted to the extent that access to available documentation allows. If subsequently there is a need to foreclose on the underlying property, there will be a need to take charge of the situation. Due diligence services can assist with the complex organizational and logistical issues that arise when taking ownership of a foreclosed property. Once an acquisition is completed, investors in the coming year can benefit from specialized assistance in preparing for the management and operation of the property. These services include compiling an accurate rent roll for internal use, preparing the initial CAM reconciliations and methodology for each tenant, providing comprehensive lease abstracts, with a summary of all essential lease provisions, and identifying and tracking all critical lease dates and options. Even in the ongoing management and operation of a commercial real estate portfolio, there are many tasks which could benefit from specialized organizational support. These include accurate invoicing of tenants for base rent, preparing CAM billing and reconciliation for each tenant, compiling and updating comprehensive lease abstracts, overseeing collections, and ensuring that adequate property management software is in place. Sizable discrepancies are often discovered when real estate portfolios undergo a thorough due diligence review, and these can have important bottom-line repercussions for investors and managers. For example, a large real estate investor in the tri-state area recently sought specialized due diligence support in conducting a comprehensive portfolio review. Combing through the voluminous documents revealed a number of significant discrepancies. For instance, when the lease files were scrutinized, many were found to be incomplete and inaccurately abstracted. Meticulous lease abstracting was therefore required in order to capture all the essential lease provisions, including summaries of critical lease dates, base and additional rents, operating expenses, and purchase, relocation and termination options. Also, a close examination of CAM structure, obligations and payment methodology revealed some illegitimate pass-throughs of expenses to tenants as well as considerable unrealized gains as a result of tenant under-billing. The results? The discrepancy on the CAM review alone amounted to an annual net gain of $80,000 to one property's bottom line. In the case of one tenant, an amendment signed in 1985, which had never been implemented, resulted in an additional $21,000 of rent per year for 23 years that the tenant owed the landlord or $483,000! For any company acquiring or managing real estate, the goal is to minimize risk and maximize return. In today's uncertain economy and constantly changing market, implementing due diligence and portfolio management strategies can ensure the clearest picture of the assets being acquired and maximize the return on properties in existing portfolios. David Tesler, Esq., is the CEO of Real Diligence, LLC and LeaseProbe, LLC, two interrelated companies that are part of Madison Commercial Real Estate Services, New York, N.Y.