The team at Chicago-based Waterton Associates was considering a note purchase in the Ft. Worth, Texas, area earlier this year. The firm’s initial review of the property took place on Google Maps, which showed a lot of land in the area, begging the question, was the price inflated? But after culling through a variety of online data sources, the cost seemed to fit with recent market sales and replacement costs.
Like many multifamily firms, Waterton is relying on a number of different tools to make the due diligence process faster and more thorough and cost effective (and, in some cases, greener). And as many apartment operators are finding, you don’t have to spend a lot of money to get the information you need. In fact, all you really have to do to get prepared for an acquisition is get online. Still, as the Waterton deal demonstrates, you can’t rely on any single technology to underwrite a deal.
Scouting the Neighborhood
When Waterton considers a deal, the first place executives go is exactly the same as the rest of Americans looking for information: Google.
“We’ll start out by looking at the deal on Google Maps and studying the location,” says Greg Lozinak, COO for Waterton, which closed nine loan transactions (worth $400 million) in 2010. “You’ll get to the point where you can get a street view to understand the immediate area surrounding the property.”
The company uses Google technology to evaluate both its loan transactions and debt pool purchases. Google Maps, with its 360-degree photo views of the streets and buildings surrounding an address, can help a buyer figure out whether a potential target is across the street from a fire house or a crack house. The value in this, of course, is that it provides a buyer with basic information without paying for the manpower, money, and time that it would take to fly—or even drive—to the site itself. “You can do almost a full neighborhood tour on Google Earth now to get a feel for a neighborhood, quality of construction, and all of the things you’d have to travel there to do in person,” says Mark Stern, senior vice president of multifamily investments for Waterton. “Of course we still see it in person, but you don’t have to have 15 people jump on the plane. The rest of the people can look through Google Earth.”
Information Sharing
Next-gen tools make due diligence greener.
The exchange of information between buyers, sellers, brokers, lenders, and lawyers when it comes to closing an apartment deal used to kill a lot of trees. People would trade lots of paper, whether in the form of faxes or as binders mailed across the country. And that’s not even counting the airline miles logged by lawyers and accountants.
Thankfully, the Internet has helped eliminate a lot of those hassles. For instance, companies such as New York-based IntraLinks can house financial and legal documents on a centralized server. “We’ve completely digitized the process and put these documents in a highly secured form up in the cloud,” says Matt Porzio, vice president of M&A product marketing for the company.
So, instead of spending time and money on plane tickets and shipping services, buyers and sellers simply log in. And, as a bonus, sellers can also see which interested parties have viewed their documents.
Even proprietary information, such as sales and rent comps of nearby assets, is no longer difficult to come by. Gone are the days of having to buy a research subscription and wait for publication. Now, the information is readily available. “You can download different types of information and slice it and dice it to find out what you need,” says Mark Stern, senior vice president of multifamily investments for Chicago-based Waterton Associates.
Still, there are limits to Google’s technology. For one, the “street view” is not available for every address. This is where a company such as Rochester, N.Y.-based Pictometry can help by using low-flying planes to take pictures of areas. Many police departments and fire departments already subscribe to its software. “Before [the police] get to a location, [Pictometry] shows a high resolution photo in 3-D of all of the buildings around the one that they’re going to,” says John Smith, chief investment officer of Rochester, N.Y.-based REIT Home Properties, which uses the service. “They know the alleys, the doorways, and they know a criminal might be hiding behind a dumpster. It is unbelievable.”
When it comes to getting to know a potential acquisition itself, however, services such as those provided by ConstructionPhotoDocs.com, a Woodland Hills, Calif.-based forensic photography firm that can take detailed shots of a property, help buyers find out more about the asset. The firm creates web pages for each asset to display these photos along with documentation on utility costs and leasing velocity for specific units. “You have all of these photos and someone can make a judgment call on what it will cost to paint or re-roof or put in new windows or whatever needs to be done when they underwrite maintenance issues,” says Scott Yahraus, a principal at ConstructionPhotoDocs.com.
Projecting the Future
Finding the deal and doing reconnaissance of the area is one thing. Projecting how the asset will perform individually or within your portfolio is quite another. Thankfully, there are tools to help with that process, as well. In many cases, those tools have been built internally by buyers who wanted to design products looking for a specific blend of performance metrics.
For instance, Home Properties uses what Smith calls a “very advanced Excel spreadsheet system” to project an anticipated sales price, what it will net in a deal, and what the internal rate of return will be. “We can play the ‘what if’ game very quickly and sell for different yields and so on and so forth,” he says of the software, which assisted the firm in closing on eight assets (valued at $338.9 million) in 2010.
Waterton, on the other hand, purchased a development system that helps it with budgeting, and that should allow them to do a rolling 18-month forecast. It can also operate with the history and rent trends in LRO. “We can import that into the year-one budget and apply growth rates that acquisitions, operations, and asset management agree to, and we can get our five-year underwriting done,” Stern explains. “It will give us the ability to do a five-year hold on a month-to-month basis as quickly as we’re doing a five-year analysis on an annual basis.”
Waterton’s program is still in development, however, and there are plenty of established technologies for acquisition modeling, such as ARGUS Valuation/DCF by Houston-based Argus Software and PropertyVMF by Santa Barbara, Calif.-based Yardi. For Yardi, the PropertyVMF program projects how acquisitions will perform on their own and how they’ll fit into a portfolio, taking into consideration factors such as whether a purchase may add too much exposure in a specific market or product type. “If I acquire this apartment complex and it needs 300 units rehabbed, which will cost me $3 million in the first year, how does this affect the entire cash flow?” asks Robert Teel, a vice president of Global Solutions at Yardi.
Ultimately, Teel says Yardi’s product doesn’t just help owners looking to make smart acquisition choices but can also be useful during the selling process—bringing the process full circle. It can forecast a potential sales price and exit timing. “It can help you decide which property to sell first,” he says. “You can use PortfolioVMF to look at the cash flows and the current value and what the IRR would be if I sold one property first and then another. You can use it to look at a buy, sell, and hold type of analysis.”