Why Real Estate Investments Should Start From Property Due Diligence? Part 3 - Business Due Diligence

This final article on business due diligence will alert investors on asset business.  The important sides to discern in real estate business are: asset management business and business that occupies your assets. As I mentioned on previous articles asset management depends how effectively you utilise asset capacity and how your assets are positioned into the market – initial yields received from open market rent, where rent levels are maintained from success of asset occupier. The rule of thumb I use in asset management – the better business perform – the faster my asset value grows. These two businesses are closely correlated and require sophisticated asset management skills to manage effectively. Looking further into the process, no matter how small or complex your asset acquisition may see to follow basic action plan helps to avoid costly mistakes. With my best intentions and knowledge let me present concise plan to follow:

Tenant Interviews – in case where it is individual asset acquisition (town house or condominium) for investment purposes it is recommended to conduct an interview with existing property occupiers. If it is your first investment to keep a good relations with tenants leads to more stable rental streams and less conflicts, when your portfolio grows into multi asset scheme – do not change the habit of contacting your tenants at least once a year. Remember that financial stability of your individual assets depends on financial status of the occupier.

In a corporate world where acquisitions of a large scale assets (commercial, industrial or multi let premises) occurs the nominated area asset manager should interview new tenants or their representatives. The aim of the interview is to accomplish the following:

a.    Provide an introduction to the investment manager as the new landlord;

b.    Better understand tenant’s business operations;

c.     Description of tenant’s organizational structure;

d.    Business background of interviewee;

e.    Determine tenant’s current use of the space (tour of the space);

                                              i.     Business offices;

                                            ii.     Storage;

                                          iii.     Parking;

f.      Establish tenant’s current view of the property;

                                              i.     Tenant space;

                                            ii.     Circulation;

                                          iii.     Operating equipment;

                                           iv.     Parking;

g.    Tenant’s observations about the management of the building(s);

                                              i.     Janitorial;

                                            ii.      Security;

                                          iii.      Billing and collections;

                                           iv.      Marketing and promotion (retail);

h.    Estimate future space needs ( where company has plans to expand);

i.      Financial performance of the business ( P&L accounts);

j.      Probability of lease renewal or expanding business expansion;

Some issues may be discovered with new landlords and tenants obligations and must be solved as per lease terms and conditions.  I like to advice landlords on spend to invest scheme attractiveness, especially in renewable energy area. Where the tenant is motivated to reduce running costs and extend lease further it is wise to step into 50:50 agreements for sustainable energy form application. First you upgrade your asset with only 50% of capital required, second your assets enhances value and starts generating better ROI, third you have a long term covenants  with tenants in place.

Property funds understand the power of insurance as a hedge against unforeseen risk, where amateur investors still trying to cut corners on this. I am strongly encourage not to neglect power of insurance. HeliosGroup.biz can assist all levels of investors with sourcing, acquiring, analyzing, reviewing, managing or disposing real estate assets.