Multi-tenant Commercial Investment Portfolio

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Asset management of your multi-tenant property can be more than managing income and expenses for new leases, renewals and relets. Consider shifting your perspective to view each asset property as a portfolio of investments. (The economic performance of each property will contribute to the returns and profits of the collection of owned assets (your core portfolio)). This will shape asset management and improve IRR, annually and over the holding period. Take these simple eight steps to carry out this shift for you.

1 Establish Your Basis. A portfolio of equity investments needs its basis to calculate a return over the holding period, so should your real estate investment. Your basis includes all costs associated with buying the property and readying it for tenant use. Each block of capital improvements updates the basis to calculate returns from (e.g. upgrades to lobby, common areas, elevator, sprinkler system, air handling systems, etc). The completed updates have created a new building ready to accept new tenants.

return on investment2 Establish Expected Returns. What returns are expected from the property? I recommend using MIRR vs. IRR to get a truer perspective of returns on investment. (MIRR factors your borrowing costs and returns from alternative investments; IRR assumes profits are reinvested into the property, which is often unrealistic.) This step requires a discounted cash flow (DCF) analysis to drive the leasing and financing terms to realize expected returns. Keep projections in the DCF as close to signed lease terms as possible; it will guide and expedite your leasing effort.

3 Bid Financing Terms. With your DCF nearly complete, put your financing terms out for bid to source the terms you’re looking for. Sensitivity analysis of the DCF can be performed to select the loan terms that meet your financing needs.

xls-anal4 Rent Roll. View leases as investments contributing to the returns of your property. The rent roll within the completed DCF serves as guide for negotiations of each lease. Collaborate DCF analysis with your investment analyst and your leasing team to ensure leasing efforts are guided by expectations of ROI. Leasing results should produce deals that contribute to the property’s expected returns, yet flexible enough to meet field conditions of leasing.

5 Operating Expenses. Use your DCF to shape efficiencies of expenses during the holding period. Trimming expenses without an end goal will likely produce marginal economic benefit. For example, negotiating property management issues and reducing property taxes should be guided by the DCF.

6 Lower Taxable Income. Remember to factor how depreciation, loan interest, and SALT payments can lower the taxable income for the property, raising its investment returns.

pm-icon7 Property Repositioning. Building systems and equipment nearing functional obsolescence (i.e. air handling, windows, elevator cabs) could be cause to vacate a percentage of the property to install capital upgrades. This should be approached as a redevelopment project that is economically evaluated to justify the investment, carrying costs during construction, and new revenue. Follow steps to plan the project.

8 Resale. Multi-tenant properties are bought based on income, expenses and sale projection; some more established landlord hold their properties for tens of years, improving returns from relets and capital improvements. A resale should be planned about 36 months before closing is needed to source a buyer at or very near to establishing expected returns. Use a copy of the completed old DCF to test it under project sale terms. That DCF will drive sourcing of a buyer to meet expected returns from re-sale.

Closing Comments. Ensure you have established all key points to making your multi-tenant property perform as a portfolio of investments; the return of each multi-tenant property contributes to the aggregate return of all properties your enterprise owns. Ensure your real estate analyst is nicely versed with Excel, Argus Enterprise, or PlanEASe to run the DCF, that includes running sensitivity analysis to test fine tuning of the DCF. Consider setting a company policy about handling each property this way, operationalizing the steps with your staff through a few test runs. Apply a project management framework to carry out the change in asset focus (Initiate, Plan, Execute, Monitor & Control, Close.)

If you agree that making this change is sensible for your asset portfolio, request a free 45 minute consultation with me by filling out the “Request a Consultation” form in the About Us web page. Please put “Asset Portfolio” in the subject line, paste the contact information of your executive assistant or COO into the message body. I will reply within 24 hours to schedule an exploratory call with your CEO or COO to assess your specific needs. Thanks for reading, perhaps I’ll hear from you soon. ###

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