Bridging the Gap Between Acquisitions and Asset Management

It’s a tale as old as time: the acquisition team scopes out a property, generates a proforma, closes the deal and hands off the property to the asset management team who must then make the property live up to the proforma. When that doesn’t happen, acquisition blames asset management and vice versa. No one wins, especially not the investors.

Some investment real estate firms are learning that there doesn’t have to be a disconnect between acquisitions and asset management. Integrating asset management objectives into  the acquisition due diligence process results in a more accurate proforma that mirrors an executable capital plan. This approach can also streamline onboarding of newly acquired assets and, in the long run, even save money and time. It requires upfront communication and a savvy due diligence consultant, as well as an understanding of some property life cycle  fundamentals.

The Old Way: PCA before Acquisition, FCA After

Traditionally, an acquisition team will order a Property Condition Assessment, which provides a snapshot of the condition of the property and its building systems at the time of the assessment. A PCA includes cost tables for immediate repairs, which cover life safety issues that must be addressed right away, and long-term costs, which cover capital expenses anticipated during the term of the PCA. Then, once acquisition is complete and the property is onboarded into the portfolio for asset management . If the asset managers choose to rely on the data gathered during the PCA to build a capital plan, they will likely struggle to make the reality of asset performance meet the expectations of the acquisition team. This is because the purpose of a PCA is risk management, not asset management. CRE buyers order PCAs to avoid unexpected capital expenditures, but even an equity-level PCA may not contain the level of data required for effective capital planning, much less appropriate maintenance  planning. The wiser option is for the asset management team to order an additional assessment, a Facility Condition Assessment (FCA), scoped to include the richer data required to effectively manage the asset. However, it may take up to 90 days to receive an FCA report, leaving the asset managers to operate in the dark for the critical first few months of ownership.

The Integrated Approach: FCA Pre-Acquisition

The forward-looking solution is to scope the PCA as robustly as an FCA—essentially, order an FCA instead of a PCA. Discuss data needs with the asset management team and build the assessment scope to ensure that the data collected will support both acquisition and asset management objectives. The upsides are cost savings (paying for one report instead of two), rapid onboarding of assets, and better synergy between acquisition and asset management because the proforma and the capital plan are based on the same data. This eliminates finger pointing and ensures that everyone is on the same page.

In one real-world example of this approach, the owner of a retail portfolio was plagued with unexpected capital expenses due to failing HVAC equipment that his PCA “missed.”  The PCA had indeed reported rooftop units nearing end of useful life, but since the center’s net lease tenants were responsible for HVAC, the anticipated expenses were not included in the capital plan. PCAs do not typically include that level of detail or a review of lease obligations.  However, a subsequent FCA captured age, EUL, and condition of units, the precise location of each along with lease and vacancy data, revealing which units served vacant tenant spaces and were therefore likely to become owner expenses.

In another similar scenario, a REIT with multifamily properties in the southeast learned the value of this approach after a series of capital planning failures due to unexpected costs in years 2-3 of their hold period. Many of these were related to mold and moisture issues. Subsequent assessments were scoped to include a mold and moisture survey expert along with a seasoned  generalist, exterior thermographic studies, an MEP specialist report, and a review of maintenance work orders at each site to refine operating cost projections. The additional data collected allowed potential moisture issues to be identified and addressed before they became larger problems, and the refined cost projections enabled asset management to build out a more accurate capital plan.

One challenge with performing an FCA at acquisition is the length of time required to gather more data; often acquisition timelines demand a quick turnaround. This is where the due diligence consultant’s capabilities and approach can be pivotal. A qualified  due diligence consultant can deliver reporting in phases, offering early feedback to address the needs of the acquisition team, and the full FCA, containing the data required by asset management, at a later deadline. It may be necessary to prepare a summary document addressing the risk management concern for a lending partner.

Correctly determining the data set and gathering quality data are paramount to the success of this approach. To excel in these functions, a consultant must be experienced in supporting asset and/or facility management as well as acquisitions. Determining the data points to be collected requires an understanding of asset performance metrics, facility management, and even lease terms and application. Effective data collection requires proper tools and training. Many due diligence consultants who provide PCAs will not have the capabilities required to scope and execute a quality FCA, particularly if they lack a robust data collection practice performed by subject matter personnel.

Next Steps: Getting Integrated

Real estate firms struggling with the acquisitions vs. asset management gap should engage a consultant who is experienced with FCAs, asset data collection, and asset and facility management , as well as PCAs. A qualified consultant will take a holistic  look at existing due diligence and capital planning procedures and facilitate a discussion between stakeholders to begin to identify data gaps that are causing discrepancies between projected expenses and actual expenses. This gap analysis will reveal patterns that indicate how to scope future due diligence assessments to meet the needs of both the acquisition and asset management teams and support a solid capital plan to ensure that the property performs as expected.