Just to end the suspense early- there is no such thing as a perfect apartment building. Measure these four things to distinguish gold from copper: Strengths. Weaknesses. Opportunities. Threats (SWOT).
A partial definition of a quality multifamily asset is one where ownership and management recognizes short-comings and can remedy or address these to compete effectively in the marketplace.
One standard business school technique teaches scenario analysis as a form of triage that can be applied to crisis management. The first thing a manager does in crisis is assess the following:
Strengths, Weaknesses, Opportunities, Threats (SWOT)
There are textbooks on SWOT analysis. Very often this methodology can be applied to a stabilized multifamily asset with the luxury of time (time to think, time to plan). Re-stating this in multifamily terminology, we can get closer to owning and operating a gold plated multifamily asset by;
Recognizing our strengths and weaknesses while taking advantage of opportunities concurrent with minimizing threats.
Following are every-day occurrences for multifamily professionals engaged in acquisitions and dispositions. In these examples, for simplicity, we are excluding references to mortgage workouts and short-sales.
Scenario #1. The perfect apartment complex! Everyone wants one, no one has one for sale and those few that are available are offered at a four cap.
In multifamily acquisitions there is no such thing as “one size fits all”. Perceived quality is exceptionally elastic. One persons quality (lots of cash flow) is not the same as for someone else (no taxable distributions).
Determining the long-term objectives of ownership prior to acquisition provides baseline information for determining targeted assets for acquisition. This is another way of saying; have a plan with input from those most impacted by the intended results.
Scenario #2. Investment committee will acquire all you can deliver… at their selected price points with limited consideration given to anything else. Equity sources require your firm to perform all necessary due diligence so they may cherry pick at will.
Even for in-house dispositions teams this sometimes seems to be the case; they work hard, very hard, to identify the best quality assets only to be shot down by the Executive Committee time and time again. Very often, the disconnect here is a matter of relationships and trust.
Multifamily acquisitions cannot be accomplished by “PowerPoint”. Acquisitions proceed based on trust and mutual benefit (I’m referring to within the buy-side entity) and relationships within the company.
An imperfect marketplace
Scenario #3. Reality is….
Reality is there are quality assets available for sale every day.
Reality is, at present, there are boat-loads of cash searching for quality assets. But it is an imperfect marketplace, it is a fractured marketplace.
Reality is 1031 Exchanges, at one time, represented two-thirds (2/3) of all transactions driving multifamily acquisitions activity. With limited 1031 Exchange activity occurring there are fewer sales/trades in multifamily.
There are fewer buyer’s in the marketplace today than five years ago. Many are well capitalized with the luxury of being selective. Then there is everyone else- where we live in the trenches.
Balancing Reality with the Current Day Marketplace
Multifamily acquisitions are being accomplished. Reviewing deals with the assumption that the equity in the deal is your money brings much clarity to deal-making. It also eliminates head games and crystallizes the tasks at hand.
Would you put your money in the deal given the investors objectives? If not, why not and does this reason increase or decrease the attractiveness of the transaction. Place yourself in the chair of the equity investor.
Know your exit strategy prior to purchase
No small task as people and property change over time. Who knew in 2007 what 2008 would bring? Do the best you can to quantify risk. Have good systems, processes and memorialize same through documentation. Communication is key.
Gold plated property? All is in the eyes of the beholder.