Originally Appeared on GlobeSt.com
The highly competitive marketplace is pushing investors to shorten their due diligence timelines to win deals. Thankfully, CREModels is here to help.
ST. PETERSBURG, FL — The commercial real estate market is becoming more and more competitive, with national transaction volumes hitting new records. As a result, investors have been forced to get increasingly creative with the terms of their offers—as well as increasing bids—to win the best deals. According to Mike Harris, a managing principal at CREModels Real Estate Consulting, faster due diligence timelines are a very common way for bidders to get their offer to the top of the list. In some cases, it can even move investors above higher offers, since a longer transaction timeframe can potentially risk the property going back on the market. But a speedy due diligence process has its own risks, says Harris, and protecting against them is where CREModels comes in.
GlobeSt.com sat down with Harris for this exclusive interview on how investors are able to bid with these tight transaction timelines and what investors need to know to make smart decisions during the due diligence process.
GlobeSt.com: What is driving these condensed timelines of CRE transactions?
Mike Harris: This is a natural response to high levels of demand in the overall commercial real estate market. Transaction velocity remains very high; last year was strong and this year looks like it is going to be the same way. Volume is being driven by low interest rates and strong fundamentals, which leads to heavier competition for all property types in all markets. One of the primary terms sellers look for during the bid process, other than pricing, are the proposed due diligence and closing timeframes offered by each bidder. Sometimes sellers will accept a lower price if a strong bidder can close quickly with a short due diligence window. Almost every seller has experienced a situation where they accepted a higher initial bid only to ultimately have the buyer retrade them down to a lower price, or even withdraw completely during due diligence.
GlobeSt.com: How do you help investors make smart decisions when time is limited?
Harris: One of the bigger issues with an abbreviated due diligence timeframe is that often going into due diligence the buyer “doesn’t know what they don’t know.” Every review of the documentation provided can uncover further issues that need addressed and often require even more documents to be produced. Because of this, it is crucial that buyers can get through a deep dive of the initial round of documents as quickly as possible. Most acquisitions teams are equipped to handle one or two acquisitions at a time with moderate timeframes, but few small to midsized firms have the ability to digest both abstracts and financial modeling on a 50-tenant acquisition in a couple days. This is where it is crucial to have a due diligence partner with the experience to quickly distill this information so buyers can make actionable decisions.
On the sell-side, having an external set of eyes is important to avoid taking the same property to market multiple times. To do this effectively, they need an impartial analysis of the details that can limit the marketability of the asset(s) and uncover potential surprises before a buyer finds them during their due diligence. If, as a seller, you want a buyer who can close quickly, you need to be prepared to act quickly as well. That means having answers to all potential questions and already having a “dry run” audit of the financials and due diligence materials. A completely vetted package of due diligence and underwriting drastically reduces the risk of retrades.
However, a lot of this benefit is lost if the review is completed by a party who lacks credibility and/or impartiality. Without these, the resulting analysis is worth very little because no parties to the transaction will trust the deliverables. We are a US-based company and we do everything out of our headquarters office in Florida. Our analysts are trained in house, so they get up to speed very quickly.
GlobeSt.com: What markets are you in?
Harris: We have worked with clients around the globe, however 90% of our work is on assets in North America. Outside the US we have worked on projects in Canada, Mexico, Europe and Africa.
GlobeSt.com: What services do you offer and what is the typical timeline that you can get investors this information?
Harris: Our core offerings include due-diligence, financial analysis, market research, and broader-based consulting services. The due-diligence service line primarily includes lease and loan abstracting and CAM reconciliation for owners, tenants and investors. The financial analysis division handles simple to complex cash-flow modeling, underwriting and lease-buy analyses, usually in ARGUS or Microsoft Excel. Our market research helps clients navigate areas including site selection, demographics and rent/sale comparables. Broader-based consulting services are more difficult to define, but recent assignments have included business process re-alignment, fund advisory, providing acquisitions support teams, fund-level modeling, and complex investment waterfall structuring. It’s important to note that we aren’t a property management or brokerage firm, and this ensures we avoid any potential conflicts.
Timing depends largely on the service line and our current pipeline. When we are working with acquisition teams, we can usually put together an entire package of abstracts with full reporting and the financial analysis in a few days depending on the size of the project. Deeper dives and pre-marketing financial audits for owners take a couple weeks. On the consulting side, projects take anywhere from a couple of weeks to a many months depending on the size and scope.
GlobeSt.com: CREModels launched in 2010. How have you seen the market change since you launched the company?
Harris: In 2010, the market was still just recovering from the big downturn. When we started, our buy-side clients were all very nervous and using us to make sure they weren’t getting into bad deals or missing out on details. Most of the discussions were about trying to find things wrong with deals. Now, they are looking for untapped value in deals these days. The sell-side has been a little more consistent, because they are always doing portfolio reviews and pre-market audits, but obviously the tone has become a lot more relaxed on their end. Our lender services have moved from doing more loan data tapes for disposition purposes to doing periodic collateral valuation reviews and covenant analyses, as well as more projects to support origination activities. We are also seeing a lot more people using us to help them start funds and underwrite new developments.
GlobeSt.com: What are some new services that you have launched?
Harris: We are constantly evolving our service lines to adapt to the needs of our clients. We have a lot of expertise in the technology space, and that allows us to create great tools both internally and externally. One of our recent developments is a tool which allows users to easily import data from ARGUS DCF into Microsoft Excel, manipulate the results and create robust reports. This is important for many of our clients because they want the ability to update their analyses on-the-fly. Also, we have recently announced our full-service fund management services. For companies looking to start a new fund, they need to develop a pitch book for investors, they need a fund-management model, they need reporting capabilities, and we can help with all of these. Also, if they are a newly created fund, they may need acquisition support and on-demand analysis, and we have found that being able to keep a small internal team without losing the ability to chase deals is a big benefit to them.