What is the most important factor in determining a commercial real estate transaction? Is it price, location, type, yield, internal rate of return or some other measuring device to ensure that a purchase will reap future value? Well, the answer is probably some form of all of the above. However, one of the most overlooked and key components in being successful in real estate ownership, investment and development, is to have a sound exit strategy in place when purchasing or developing a real estate asset.
To many corporate real estate companies, having a sound exit strategy is just as critical to a remunerative deal as all of the other investment aspects when considering a certain purchase or development. Two important components to an exit strategy are: First, what is the strategy of disposing of the asset? Second, ensuring that the design and or existing build-out of the space are conducive to the lowest possible occupancy cost for the facility and afford the greatest amount of flexibility for current and future occupancy.
In evaluating a particular investment, it is critical to have an exit strategy in place prior to acquisition. Experienced investors and developers have an exit strategy in place and a time frame for implementing that strategy throughout the transaction process. What are different kinds of exit strategies that are considered? Obviously the landscape of real estate investment is dynamic and forever changing, but institutional investors formulate an initial exit strategy, and then look at how that plan might be changed or altered in changing market conditions. Altering the course of the initial strategy is influenced by a variety of factors and each asset is unique, but at the end of the day it is important to consider who the likely buyers will be and how market conditions will affect disposition of the asset.
Prior to investing in a property many buyers will want to know: Who are the owners of other like-kind buildings in the greater market area, what are the trends of ownership, is ownership largely private or institutionally based, and what are the demographics? It is the goal of satisfactorily answering these questions to create a high degree of comfort in knowing that the exit side of the equation has been promulgated during the purchase or development.
The other exit goal is directly related to flexibility and cost during the ownership of an asset. In purchasing an existing asset there are numerous considerations in determining the driving forces behind keeping future flexibility to a maximum while minimizing occupancy costs. Some questions to consider would include:
* The design of the building. Is it single tenant or multi-tenant? If it is single tenant, how difficult would it be to change to a multi-tenant facility and at what cost?
* What is the ability to re-lease the building if vacated?
* What are the expansion and contraction options?
* What is the projected lease-up time upon vacancy and the amount of tenant improvement dollars to budget for re-leasing?
Then there’s the aspect of dealing with an already occupied investment property. It is imperative to know all aspects of the tenancy that comes along with a building and the positives and negatives that come along with the future relationship.
Not only is it important to look at the fiscal condition of the tenancy, but many industries continually go through significant change as a result of a multitude of factors including consolidation through mergers and acquisitions, overcapacity of production facilities, need for greater productivity from their R&D programs, growing cost pressures, regulatory hurdles, constrained capital, facility functional obsolescence and growth and service patterns, to name a few. All have a significant impact on the overall value of the building and are part of developing an overall exit strategy when going through the due diligence process.
In all, the real key is to balance risk and return and having an exit strategy is imperative in that evaluation. Said Luis Belmonte of AMB Property Corporation: “It is a lot easier to buy a property than to sell it. We think about our exit strategy all with way into a deal. Everything we buy must have an appeal to a broad market. Everything we buy must be of institutional quality so that when we are ready to exit, we will have a broad cross section of buyers. Everything we buy has to be salable. It does not have to be salable the minute we buy it but it must have a development plan.”
So, always remember to think about the end result before jumping in with both feet. As stated by Steve Pumper of Transwestern Commercial Services, “In the end, real estate is like any other business; you have judgment calls based upon knowledge. At some point, you are either in the real estate business or you are not.”
Scott Shanks is a vice president for the office properties group of Alliance Commercial Real Estate. Contact him at email@example.com.
The hiring of a management team marks the latest achievement for Reno Ice, which hosted a virtual groundbreaking on April 30 for the $9.5 million first phase in the opening of the Jennifer M. O’Neal Community Ice Arena.