Operating Budget Underwriting and Anlysis

[Anonymous]

Hi A.CRE Team:

If you don’t have a proprietary database of a given property type, what recommendations do you have how to optimize or appropriately underwrite the operating budget for that property type so you can compete but not unrealistic in your assumptions?

Aside from historic financials, Dd any of the databases you recommend/reference include operating data? Should we consult a property management company?

My experience with broker’s underwriting is it is a highly optimistic rose-tinted view of how a property would perform on a pro forma basis and are generally not that reliable as a resource.

Thanks!

[Michael Belasco]

Hi Nick,
Thanks for the question. Although they may exist, I am not aware of any widely marketed databases for operating data. However, I don’t think that will be an impediment to helping you come to reasonable assumptions for operating projections.

Since operating budgets are first and foremost, property specific, and secondarily market specific, I would say that the best resources for getting comfortable around op ex projections for a specific property are through the property’s historical operating statements in combination with sourcing further market data and intel from the broker and/or the local broker community, other OM packages of similar asset types, and definitely local property managers, if they are a resource available to you. Triangulating between these sources should be more than sufficient to get you comfortable around your operating projections. I will elaborate on each resource a bit more below.

Historical Operating Statements

Since every property is unique unto itself, the property specific historical operating statements are actually going to be the best resource and starting point for understanding what it takes to run the property and what future costs might be. Using these statements in tandem with learning how the day to day operations run and who is running them, can help you understand if the asset you are looking at is operating efficiently or if there are specific areas where you may be able to decrease costs while preventing a decrease in revenue. If you are unfamiliar with what you are looking at and if the historical operating statements seem unusual, then this is where the broker and/or a local third-party management company may be a great asset to tap into.

The Broker

To your last statement, yes, part of a broker’s job is to sell the upside scenario or most optimistic (and yes, at times, unrealistic) outcome of a property to achieve the highest purchase price possible for their client. I wouldn’t necessarily say their pro formas are unreliable, but more often an overly optimistic starting point and it’s our job as prospective buyers to check the likelihood of it and bring things back into what we would think is a more likely future scenario.

However, a reputable broker can be incredibly helpful as they see tons of volume, which gives them lots of data points; they know the market; and can actually guide you in the right direction by talking with them and asking them to walk through their proforma assumptions with you. Often times, it is during these conversations that you can suss out great intel or learn quickly if they are blowing smoke with their projections. Point being, that talking with the broker will be an important and critical step to dialing in your operating assumptions.

As a side note worth mentioning: brokers will be one of your most important contacts in the industry for both opportunities and data. Learn who the reputable brokers are and get to know many of them. Take them out for drinks or lunch! When you develop relationships and start doing business with them, they can be an incredible resource to lean on and many are happy to provide intel whether you are working with them on a particular deal or not.

Historical Op Ex From Similar Asset Types

Historical Operating Statements from comparable deals will be excellent benchmarks to help you assess op ex for the property in question.

Third Party Operating Company

A local property management company that works with similar assets in the same market would be a fantastic resource to vet through the historical operating statements to see if they notice anything that is out of whack or areas of opportunity. However, unless there is an existing relationship, you are potentially offering them an opportunity to manage the property if you purchase the building, or if they already do business with you; it may be difficult to get them to provide input.

Let me know if you have further questions on this.

Thanks again!

MB

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