Family Office Due Diligence in Real Estate – As family offices discuss getting involved in more direct transactions as an alternative from paying a fund manager, real estate is the common investment of choice for many families looking at direct assets – especially multi-family properties.

If a family’s background is real estate, this can be a natural transition.  If your family has no background in real estate, this could be a much more challenging process.

Even in a direct transaction, if you are partnering with a regional operator or hiring a property management company, you are paying fees.  If you lack experience in what you are doing in real estate, it could cost you more than you were trying to save by avoiding fund managers.

As a family office, we are often approached by real estate operators who are looking for an investor to cover the majority of the investment dollars to acquire or develop real estate assets.  The operator a family office chooses will make a tremendous difference in your level of success.

I always recommend looking at the people first.

It honestly is no different than looking at a fund manager.

Look at the track record first. Do they have a track record mostly concentrated within the subject asset class and region?  If the operator is experienced in the Pacific Northwest in office assets and wants to join the masses to enter the multi-family market in Dallas, you need to be cautious.

What was their track record in the last down market?  This often separates the highest quality operators from the mediocre.  Everyone has rode the wave the last several years in the run up of multi-family assets.  But the market will correct itself again at some point sooner than later.  Are the margins wide enough if the market really tightens within the next few years and will there be a strong pool of institutional strength buyers for your 1970s vintage asset in certain tertiary markets when the market turns?

I always look at the quality of team the operator surrounds himself with and how long has that team worked together.   I was reviewing a transaction for someone recently.  I liked the experience of the team, but they have only worked together for a short period of time and have no experience together on a large transaction.  That adds to the level of uncertainty.

Once you get past the people, then you have to understand what the true alignment of interest is. Are they putting enough of their own cash into the transaction and are they signing on the debt obligation? Then based upon those factors, are the economics they are proposing with their financial model compelling enough for your interests to align?

And finally, let’s look at the market itself.

What is your competition in the market?  How many other similar assets are you competing with in the market and sub-market where the subject asset is located?   How many new construction units are in the pipeline and entering into the market in the next couple years?

What is the tenant base in the sub-market?  Are there enough quality tenants available in the market that there will always be a quality tenant demand if you are providing a quality product?

This is a lot to think about when performing just the basic surface due-diligence before even getting into the deep analytics.

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