Investors interested in purchasing a commercial real estate (CRE) asset tend to spend a significant amount of time analyzing the financial aspects of the property like cash flows and return metrics, the physical aspects of the property like location and condition, and the operational aspects of the property like expense ratios and collection rates. While all of these metrics are important components of analyzing the potential success of a real estate investment, they all tend to overlook an equally critical success ingredient … something we call the “human element” or relationships.
In this article, we’ll explain a few examples of relationships in commercial real estate investing and describe the key components to look for in a working relationship.
Types of Relationships in Real Estate Investing
The human element in real estate is the idea that at the heart of every property, lease, renovation project, analysis package, and tenant is a relationship that must be fostered and developed to ensure an investment is successful. For example, a property may have the best location, strongest tenant base, and highest rental rates, but if the individual(s) managing the property lacks the competence and experience to do so profitably, the financial and operational advantages don’t matter.
In our business as professional investors and money managers in the real estate industry, we feel confident that we have the right team of analysts and asset managers to cover the human element of property acquisitions and management, but we rely on a few key relationships to maintain our deal flow and keep our properties full:
Brokers / Realtors
Commercial real estate brokers and real estate agents are individuals hired to assist property owners with the sale and/or lease of their properties. Often, they have a first look at properties and/or spaces before they hit the market and are empowered to negotiate deals on behalf of their clients. Through years of experience, we understand that significant and consistent deal flow is critical to the efficient deployment of our investment capital and brokers are key to this. We have worked hard to develop a nationwide network of top commercial real estate brokers and to communicate our investment criteria to them. As a result, we are often one of the first calls they make when listing a new property, which gives us a leg up on the competition.
Lenders
All of our purchases are financed with a mix of debt and equity so we rely on a handful of key relationships with bankers and lenders for the capital needed to originate and/or refinance debt on our investments.
Contractors
We prefer a value-add approach to our properties, which means that we are often initiating projects meant to raise rents and/or Net Operating Income. In many cases this means slight to significant renovations that must be completed on time and on budget. As such, we rely on a wide network of trusted general contractors to complete this vital work.
Tenants and Tenant Representatives
Of course, all of the work that we put into beautifying and repositioning our assets means nothing unless we are able to lease the space. To do so, we rely on long standing relationships with national companies like grocers, gym owners, and major retailers to fill the space in our assets. In some cases, we work directly with the companies themselves to negotiate leases. In other cases, we work with the real estate professionals who negotiate on their behalf.
While there may be no doubt that the human element of real estate is critical to the success of an investment, it can be much more difficult to identify the components of a relationship that correlate with a promising outcome.
What to Look for in Working Relationships
Relationships can be a difficult thing to assess. Human beings can be unpredictable, and it is always difficult to gauge their true intent in a given situation. However, there are a few hallmarks that we look for as a predictor of a solid working relationship:
Honesty
When large sums of money are at stake, individuals have a tendency to behave in a manner that allows them to profit the most. These are not the individuals that we prefer to deal with. We look for counterparts who are honest to a fault, especially when delivering bad news, because it tends to benefit all parties in the long term.
Integrity
In any given situation, we prefer to deal with individuals and firms who do exactly what they say they are going to do, when they say they are going to do it. We have found that integrity is closely correlated with honesty and a strong predictor of successful relationship outcomes.
Experience
Commercial real estate can be a complicated business and it can take many repetitions and countless hours of legwork to gain the needed experience to succeed. We prefer to deal with counterparties who have a significant amount of experience in their respective fields and gauge this by asking for the credentials and prior work history prior to entering into any sort of work agreement with them.
History
New relationships can be difficult so we prefer to work with individuals and firms with which we have a shared history. This provides us with a significant amount of comfort when entering into an agreement because we have worked with the individual/company before and we know what to expect.
Expertise
Again commercial real estate can be complicated and there are many different disciplines within it. It can be difficult for one individual or company to master all of them so we look for specific expertise in whatever we are trying to accomplish, as evidenced by education, advanced certifications, and/or a significant amount of experience. For example, we would not hire an appraiser to complete a renovation and we would not hire a contractor to complete an appraisal.
While the elements above are meant to describe what we look for in our relationships, they can also be used by passive investors to evaluate potential transaction sponsors.
Interested in Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in. We put personal relationships at the forefront of everything we do and believe it is an element critical to our success.
Whether you’re just getting started or searching for ways to diversify your portfolio, we’re here to help. If you’d like to learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrealtypartners.com for more information
