Photos

Due diligence is a great time to capture a photo perspective of the property.  Photos should accomplish a number of items:

1. The best faces of the property will give a good start for the property website later.  These photos may be where you begin before you are able to capture professional staged photos of views and residents later on.
2. Photos should capture each critical view of the units, the buildings, the grounds, amenities, nearby shopping, neighborhoods, nearby sites.
3. Photos should provide critical information for planning improvements, staging the office and a myriad of other items.

Photos are one of the critical items for showing the property to investors, to lenders, to staff and support contractors as you develop initial operations and business plans.

2009 Wrap Up

During 2009, we’ve seen many projects run into problems as loans came due and changing values, changing ratio requirements for Debt Service Coverage, changing Loan to Value expectations, softening occupancy, and other issues began driving ever larger numbers of multfamily projects into default and into foreclosure.

For 2010, the industry must return to basics and step up commitment to assure effective due diligence.  The time to save time and money is not during due diligence.  In fact, as an industry companies that step up their game providing a new level of due diligence focusing on a range of factors:

• Assuring asset value to support the purchase.
• Maximizing the right marketing plan to rent up and maximize revenue.
• Creating plans to increase asset value down the road.
• Developing plans to minimize maintenance and support costs.
• Developing an integrated complete business plan for the purchase.
• And so much more.

2010 and beyond will require more discipline, focus, and skill than Investors needed in the past… Are we up to it?

2010 Multifamily Due Diligence Discussion Overview

Earlier today, I completed a post outlining critical due diligence areas for investors.  I will be using this broad “outline” of topics to guide and complete a detailed review of critical investor due diligence considerations.

If any would like to participate in this, please offer comments to the original article or as we cover items, I’ll be happy to add and credit your thoughts as part of the broader dissection of multifamily  investor due diligence.  Selecting investments in the  apartment industry is a complex and broad area covering much more than the initial review that I have offered.

Additionally, I will be reposting the original article from time to time as I identify and add more subjects to the outline that I’ve overlooked so far.

Investor Due Diligence Requires Detailed Understanding of Improvement Plans

As an investor, improvement plans require close examination.  Without examing actual contractors bids, resumes, human resource requirements, and costs, this can be disasterous.

Here are some thoughts of mine from a recent ezine article I prepared:

An important investment consideration is the construction and improvement plan. This plan must be reviewed on several levels including:

• Human resources quantity and skills,
• Cost of materials,
• Cost of labors, and
• Schedule.

The Company should have project schedules per property.

Additionally, for an established multifamily operation considerable savings are likely to be possible using and expanding existing staff during key periods of the improvement plan.

The initial startup of an improvement plan represents a period of considerable risk. Part of the plan should include improvement high value items that can be addressed by the internal staff or expansion of that staff. For example, in a recent project approximately 100 units required basic make ready work. By weighting the plan to complete these items, the Company has the opportunity to keep the plan on schedule as the more complex improvements ramp up to producing ready units.

Additionally, simultaneously completing high value external work can often run simultaneously for several items. For example, roofing, landscaping, and building wraps may be executed simultaneously.

Next, the Company has to consider choke point skills such as electricians and plumbing to consider how this will pressure the deliver schedule.

After considering these points, realistic rental schedules for multiple projects can cause the improvement plan to run in stage between several properties resulting in staggered availability of units designed to more closely match the ability to rent up.

Additionally, the marketing plan requires review also as the cumulative effect of marketing. Beginning advertising does not instantly produce prospects. Because of this, the plan will consider and plan delivery of units to attempt to match this ramp to ready unit delivery.

If all of these are correctly correlated, the Company will have the opportunity to achieve the greatest NOI on the lowest cash flow requirement.

While the above items are important, the Company must next consider cost of materials and cost of labor. Cost has to be considered from multiple contractor bids and then balanced against capacity and cost from internal delivery. For an apartment manager, the key considerations are likely to revolve around the major day-to-day activities. Normally, these are painting, basic carpentry, appliance, and flooring services. The chances are very good that the cost efficiency of the business exceeds a General Contractor’s delivery ability. Secondarily, a major cost consideration will include items that can be completed “free”. Items falling in this category will include items that can be accomplished in the course of completing make readies. Some items that stand out are:

• Medicine cabinet installation,
• Mirror installation,
• Towel bar installation,
• Some doors,
• Some locks, and
• Similar items

In addition, to the items described so far, due diligence should require providing local pricing by material, appliance, labor class hired or contracted, etc.

Next, all improvements should be tied to several key areas:

• How much revenue can be generated from an improvement,
• What deferred maintenance items must be addressed immediately,
• What deferred maintenance items are anticipated in the short run,
• How much cost can be avoided based on given improvements,
• What improvements are required to support increased valuations

Finally, the improvement plan should be supported by a review of the resumes of the managers, project managers, internal maintenance staff, and temporary support staff verifying the skills and experience is adequate to protect the budget and complete the activities required.

Having completed all of the above steps, the investor should have in their possession:

• Detailed project plans and schedule,
• By month project budgets,
• Detailed enumeration of the project material costs,
• Resumes of resources (contractors and staff) that will be completing the improvement plan.

If work will require new buildings or major changes, the investor should receive drawings and formal bid responses.

If the work will require permits, permits must be completed before actual work is funded.

The investor should require that during the project that the improvement plan processes will include:

• Photos of the project improvement areas prior to the work,
• Photos of the project post completion,
• Detailed receipts for all work completed.

A sound way to manage these projects is to:

• Provide a reasonable initial draw, and
• Allow subsequent draws up completing work of the past stage (with documents as described earlier).

With these items in place, the risk of failure is sharply curtailed and the likely success is significantly enhanced.

Signage is Often Under Used by Apartment Complexes

Signage remains one of the most effective advertising modes available to businesses. However, the advertising campaign often gets little attention during due diligence and along with this fact signage is often left to wait for a post closing day. The wise investor will have their eye on this requirement while completing due diligence. Identifying the best roads for signage and determining whether they can serve as a good feeder for a property can be a determining factor for the success or lack of success an apartment complex will enjoy.

Commonly available statistics on billboards for instance shows that in a large metro on a good traffic artery, signage can produce thousands of additional web visits per month.  Clearly, time spent on signage can be a real value producer.

Keep in mind when considering signage, a well run property can capitalize on much more signage than just that in front of the property. Additionally, consider very carefully how signs can and will be located on your property.

What considerations are important?

· Are there major arteries in direct proximity of the property (within a block or two)? · If there are major arteries, what are the principal sources of traffic on these roadways and is it significant to your property? · Find out who owns billboards along these roadways. Get pricing for monthly signage, term requirements, set up fees, and car counts for the direction faced by the property. · If you have or will have more than one property in the area, will the location be able to serve both? · If more than one sign will be used, what discounting will the sign management company offer? · Does the property require directional signs to be easier to locate? · Are there business site nearby where you can mount permanent or semi permanent advertising signs? · In areas where you will place the sign, what are the predominant background colors? Are there seasonal considerations effecting the background color. Nothing is a greater waste than a sign that no one can see? · What are local regulations regarding signs? · Does your property offer frontage that could provide a valuable sign location? Can this provide incremental revenue to your property? · How large of a sign can the property support? How high will it need to be? Are there obstacles that must be accounted for?

In the case of one property we own and manage, installing a large visible sign move the project from struggling with occupancy to an instant success. The 4X6 sign at this location is only visible from one direction, but because of the high volume of traffic past the location the sign produces 2 or 3 visits and an equal amount of calls daily. Regardless of season of year or economic conditions, the sign keeps this property full and rents trending upward.

At another property we own on a very high volume road, the sign has produced as many as 25 calls and visits in a single day. While this is not a normal daily event, this event certainly shows the importance of signs in your marketing strategy. Any element so important to the success of a property should not be overlooked by investors.

Keeping these ideas in mind can dramatically improve the performance of your property. Also, if you are interested in learning more the U.S. Small Business Administration offers much useful information regarding the effectiveness of signs, how best to set up signs, and many other considerations that may prove important to your property.

Key Areas of Due Diligence

When thinking of due diligence, investors need to consider the main areas that determine a successful investment.  From our perspective this includes:

1. The sales contract and legal issues,
2. Market factors,
3. Physical property factors,
4. Resident base (current and planned),
5. Local tenant rights,
6. Local tax factors,
7. Local and property crime factors,
8. Local labor access and costs,
9. Local supplier costs,
10. Management plan and factors,
11. Business plan
12. Financing and structure of financing

Completing these areas effectively  can:

• Save capital costs,
• Increase immediate revenues,
• Prevent poor investments,
• Sharply reduce risks

The skills necessary to perform these take years to develop and are continually refined.

Join the Discussion about Due Diligence Processes, Issues, Services, Etc.

Today’s financial and business environment demands greater attention to detail, better analysis, improved tools  and processes for due diligence.  This blog is intended to begin filling the void.

Additionally, this site complimentary to the Apartment Industry Due Diligence Group recently founded there.