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Presentation by Real Diligence, LLC to teh Arkansas Bar Association
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Financial Due Diligence and Portfolio Management in Today's
Volatile Real Estate Market
By David Tesler, Esq., CEOReal Diligence, LLC
Arkansas Bar AssociationApril 27, 2010
About Real Diligence
Real Diligence, a commercial real estate financial due diligence company, that provides a host of services related to the acquisition and ownership/ management of CRE.
• Financial Due Diligence
• Lease Abstracting
• CAM (Common Area Maintenance)
• Tenant Estoppel and SNDA Preparation
Financial Due Diligence
Financial Due Diligence is valuable at all points in the acquisition process
• Pre-Acquisition Due Diligence – screening a deal before going to Contract
• Acquisition Due Diligence – acquisition / valuation, etc.
• Post-Acquisition Due Diligence – property management support
Pre-Acquisition Due Diligence• Check accuracy of broker presentation for
math and clerical errors (Exhibit 1)
• Cross-check broker presentation with seller’s numbers (Exhibit 2a and 2b)
• Check Rent Roll to ensure it is up-to-date• Check assumptions used for the forecast
(Exhibit 3) • Develop a financial investment model,
assuming the numbers are correct
Financial Due Diligence
Acquisition Due Diligence consists of four steps:
1. Rental Income Verification2. CAM Income and Methodology Review3. Expense Verification4. Recovery Analysis
Financial Due Diligence
Acquisition Due Diligence1. Rental Income Verification, including:
– Current Rent Roll Verification
– Current and Future Base Rent
– Percentage Rent
– Additional Rent
– Miscellaneous Income: storage, parking, etc.
Financial Due Diligence
Acquisition Due Diligence2. CAM Income and Methodology Review
Tedious and complex, but well worth it!
– Identify Landlord’s expenses for which Tenant has reimbursement responsibility (Exhibits 4a and 4b) (Exhibits 4c and 4d)
– Verify the amount of the Landlord's expenses (Exhibits 5a and 5b)
Financial Due Diligence
Acquisition Due Diligence2. CAM Income and Methodology Review
(cont.)
– Apportion expenses according to the appropriate depreciation schedule (CapEx)
– Define the Tenant's Pro Rata Share of expenses (Exhibit 6)
Financial Due Diligence
– Calculate the total amount of the expense as they relate to the Tenant (Gross Up) (Exhibit 7)
– Adjust the Tenant's share with Caps and Expense Stops (Base Yr, Caps, Floors) (Exhibit 8a and 8b)
Financial Due Diligence
Acquisition Due Diligence2. CAM Income and Methodology Review
(cont.)
Acquisition Due Diligence3. Expense Verification (Ex. 9a and 9b)
Historicals and back-up for every expense for past 12 mo / 4 yr comparison– Real Estate Taxes– Operating Expenses– Capital Improvements (Exhibits 10a and 10b)– Tenant Improvements – Leasing Commissions
Financial Due Diligence
Acquisition Due Diligence4. Recovery Analysis
Are the tenants actually paying what they should be?
– Request tenant checks – Review bank statements
Financial Due Diligence
Acquisition Due Diligence• Conclusion:
– Executive Summary Report Clear, Concise and User-Friendly
– Full Back-up Documentation
Financial Due Diligence
Post-Acquisition Due Diligence
• It often makes sense to outsource the management and operation of CRE.
Financial Due Diligence
Post-Acquisition Due Diligence• Compile a final Rent Roll for internal use
(Exhibit 11)• Ensure all rent is being billed according to leases • Prepare initial CAM reconciliations and
methodology per tenant (Exhibit 12)• Ensure CAM invoicing is accurate
(Continued)
Financial Due Diligence
Post-Acquisition Due Diligence• Provide comprehensive lease abstracts for
each tenant (Exhibit 13)
• Bookmark lease documents
• Summarize all critical lease provisions
• Identify and track critical lease dates
• Ensure adequate lease administration software is in place
Financial Due Diligence
Financial Due Diligence
Portfolio Management and Optimization• Organize entire Lease Portfolio • Review and abstract all lease-related documents with
particular emphasis on financial information and critical dates
• CAM reconciliation and billing • Lease administration - monthly/weekly report with all
action items:- rent step ups
- CAM reconciliation
- renewal notice
- termination notice
Lease Abstracting is the foundation of financial due diligence
• Since most of a property’s financials emanate from the leases, it is critical that leases are reviewed and abstracted by professional lease experts
• Lease abstracting is also critical for the effective ownership and management of commercial real estate
Lease Abstracting
CAM
Calculate CAM Reimbursements
Based on the abstracts (lease abstracting) and an analysis of expenses (financial due diligence) that can be legitimately passed through, only then can each tenant's CAM reimbursement can be calculated accurately.
CAM
CAM Reconciliation by a specialist can:
• Maximize the expenses that can be legitimately passed through to tenants
• Relieve the owner of the burden of CAM calculation and tenant billing
CAM
Know your CAM
• If CAM is found to be higher than it should be, the landlord will face a cumulative overcharge amount for which it may not have budgeted
• If CAM is found to be lower than it should be, then landlord/owner can happily increase its income
Tenant Estoppel Certificate & SNDA Preparation
Tenant Estoppel Certificates and SNDA Preparation are a part of every acquisition / disposition. (Exhibit 14)
