Every commercial real estate operator completes some level of due diligence before closing on the acquisition of a property. Due diligence practices vary widely across the industry with some firms focusing on quantitative models and others placing emphasis on qualitative factors.
At First National Realty Partners, our approach to due diligence brings together experts from every area of the firm into a tightly-knit and agile team – known internally as the FNRP Strikeforce. The Strikeforce is tasked with validating earlier due diligence by performing a thorough and multi-dimensional physical inspection of each property just prior to acquisition. Over time, this approach has served as a capstone to an already stringent filtering process that focuses our team on assets that most closely align with our acquisition criteria.
The FNRP Strikeforce Mission Statement
Through years of experience across market cycles, the FNRP leadership team has refined the Strikeforce approach into a comprehensive due diligence process centered around a basic but powerful mission statement – to confirm previously completed underwriting and to reaffirm the business plan. These are key considerations during an acquisition because they feed directly into financial projections and help management to gauge the risk/return profile of the deal and the likelihood of achieving the targeted return metrics. The Strikeforce fulfills this mission statement by focusing on four key dimensions.
Physical Examination of the Property
Visiting a commercial property prior to acquisition is a critical component of the decision-making process. A physical inspection of the site provides valuable insights into its condition, potential challenges, and local market dynamics. This firsthand experience empowers the Strikeforce to identify opportunities and risks that were not detected through earlier due diligence efforts.
Engagement With In-Place Tenants
The FNRP Strikeforce prioritizes the engagement of in-place tenants before acquiring a property. These conversations can improve the accuracy of leasing and financial assumptions that help management gauge the value of the asset. They also offer valuable insights into lease satisfaction, potential physical, financial, or legal issues, and often reveal daily operational challenges that tenants face under current ownership. The Strikeforce team incorporates tenant feedback into the due diligence process and uses it to foster positive tenant relationships and a seamless transition should the asset be acquired.
Local Market Tour
Prior to the deployment of the Strikeforce, a group of FNRP analysts completes in-depth research on the subject property and the local market. This research is primarily quantitative and data-driven, and it goes a long way toward vetting an asset for investment. However, quantitative due diligence is only part of the FNRP approach.
One of the most valuable aspects of the Strikeforce approach is the ability of a multifaceted team to physically tour the market where the asset is located to gather qualitative information about the dynamics of the property, the local market, and competing nearby properties. This includes observing traffic flows, commuting dynamics, parking availability, and whether the property is positioned to benefit from these.
The Strikeforce team also spends time speaking with local brokers, tenants at the subject property, and tenants at competing properties to gain a complete understanding of the types of tenants in the market and the competing properties vying for these tenants. This helps management understand how the needs of the tenant base in a particular market align with the physical attributes and positioning of the subject property. Collectively, management uses this information to determine the feasibility of the property as an investment as well as the likelihood that the business plan will be achieved.
Finalization of the Business Plan
Once the FNRP team identifies a property that meets a set of basic investment criteria, the leadership team drafts a business plan based on previously completed research and the team’s vision for the asset. The goal in drafting the plan is to provide all stakeholders with a common vision for the property, and it is used as a cursory guide on how the investment is expected to evolve throughout the holding period. After visiting the property, the Strikeforce team holds a debriefing session to discuss potential updates to the business plan. The outcome is a plan based on input from each functional area, and as a result, it provides a comprehensive vision for the property and the most likely outcome for investors.
Strikeforce is the Embodiment of FNRP360
After many years spent acquiring commercial property, the FNRP leadership team developed an in-house management and operating platform known as FNRP360. The key feature of the FNRP360 platform is vertical integration where all the functions necessary to operate commercial real estate are brought together under one umbrella. In fact, this framework makes the Strikeforce approach possible because only a vertically integrated firm can put together a team that includes experts from every function. This results in a thorough due diligence process, and one that goes beyond the approach taken by many commercial real estate acquisition firms.
Many private equity commercial real estate firms outsource key operations such as accounting, property management, asset management, acquisitions, legal, and leasing. In contrast, the premise of FNRP360 is to combine these functions, bring them in-house, and create an integrated system of rapid information sharing that enables our team to execute on acquisitions and asset management plans with unmatched agility. The FNRP Strikeforce is comprised of leaders from each of these areas, and they are responsible for providing input on each potential acquisition based on their specialized point of view.
Strikeforce Promotes Internal Accountability
The Strikeforce model is designed to ensure that accountability is at the heart of the due diligence process. It brings together the team members who will be responsible for managing the asset post-closing and incentivizes them to work through the due diligence process together, while considering every angle presented by fellow experts. The end result is a team of commercial real estate professionals working in lockstep to perform due diligence on an asset with an eye toward the management of the property once acquired.
Many other firms send an acquisitions representative to tour a property prior to closing, and the representative provides a report to the firm’s decision makers about the general condition of the property. It is important to note that an acquisitions representative is usually not responsible for managing the property once it enters the portfolio. This can lead to accountability gaps where the employee performing the site visit may not be incentivized to thoroughly consider the factors that will impact the management of the property.
Fostering Collaboration Between Experts
The Strikeforce framework ensures that our team of experts works in close collaboration to visit and assess a property in a very condensed timeframe. An FNRP site visit includes members from asset management, property management and construction management. Bringing a diverse team to the site ensures that every member of the Strikeforce is positioned to provide input on capital improvement needs, identify deferred maintenance items, and contribute to the development of a full operating expense budget for the asset.
After visiting a property, the Strikeforce team meets to compare notes on the property and discuss how findings from the site visit should be incorporated into underwriting models. Site visits and discussions with tenants often necessitate updated assumptions related to lease terms, renewal rates, and rent growth over the projected holding period. The nimble team structure allows for rapid iteration to quickly arrive at the most realistic underwriting assumptions and a set of pro forma projections that most accurately reflect the condition of the property.
Additionally, deploying the Strikeforce to a property prior to acquisition offers insight into the nuances of the property and helps the team to devise a post-acquisition asset management plan. As part of the due diligence process, the team takes great care to arrive at accurate estimates of the capital expense budget as well as ongoing maintenance expenses.
Many private equity commercial real estate firms struggle with the transition from acquisition to ownership. By including asset management leadership, the Strikeforce positions FNRP for the transition from acquisition to property management. Based on the site visit, the asset management team is better positioned to execute on the business plan on the day of closing.
The Strikeforce Brings Unmatched Benefits to FNRP Investors
The FNRP leadership team holds every employee accountable and seeks to uphold the highest level of fiduciary responsibility toward each investor. The Strikeforce initiative is the embodiment of this sense of duty as it brings together a diverse team of professionals with deep experience managing commercial real estate assets to conduct site visits and comprehensive inspections. Through this process, investment risks are detected and mitigated as much as can reasonably be expected by a team that dedicates ample time, energy, and resources to the task.
Investors who choose to partner with FNRP are instilled with confidence in the two ways the Strikeforce framework promotes risk mitigation prior to acquisition. First, investments that have undergone thorough due diligence, including a Strikeforce site visit, have been vetted for hidden risks with an eye toward managing the property post-acquisition. Second, the Strikeforce model facilitates discussion among leaders from every facet of the firm and ensures that each leader has a voice at the table to put forward thoughts and provide input to update valuation assumptions and calibrate underwriting models.
Interested in Learning More?
The FNRP Strikeforce approach is unique in the industry and sets FNRP apart from other private equity commercial real estate firms. By focusing on key elements of a successful acquisition and bringing together the expertise embodied in the FNRP leadership team, the Strikeforce framework ensures that each property is fully vetted and that risk mitigation is baked into the acquisition process. To learn more about FNRP, click here.
