Updated: Jul 22, 2021
A significant amount of effort goes into researching, analyzing, and performing due diligence on a potential commercial real estate investment. New owners hope that all of this hard work will culminate in a smooth and successful closing. But, when a new owner has closed on a property, can they breathe a sigh of relief and take a well-deserved vacation? Unfortunately for a new owner, once the acquisition is complete, an even greater level of focus and attention needs to be paid to the property. The critical decisions that determine the short and long-term success of the investment have to be made at this time.
One of the most important decisions an owner needs to make about their commercial property is how it will be managed. Whether the owner chooses to hire in-house personnel or selects a third-party property manager, the key factors that go into the decision are the same. These key factors can be summarized into three main categories: operations, tenant relations, and financial operations. To evaluate these factors, new owners can ask themselves the following questions to guide them in their decision-making process.
1. Do we have a high level of expertise in evaluating the property from an operational and systems perspective?
The level of expertise in the operations and systems of a commercial property will drive every decision made at the property level. This starts with staffing the property. Given all the property's physical attributes, what is the most effective and efficient way to staff the property? Does it need a full-time manager on-site? Are full or part-time building engineers needed? The way a property is staffed directly impacts every other aspect of the management of that property. Therefore, it is of the utmost importance to get this decision right.
Once the property is properly staffed, management and building personnel can collaborate to take a deeper dive into the operational and systems details of the property. This process will lead into the next phase of decision-making, where a high level of operational understanding is necessary, developing an operating budget. Developing an efficient and realistic operating budget for a property needs to be prioritized by new owners. If done properly, the budgeting process will identify opportunities for improved performance and cost savings.
The importance of having the expertise necessary to staff the property and build the initial operating budget cannot be understated. If a new owner determines they do not have the level of expertise required in-house, a third-party manager that can provide the expertise in this area should be considered.
2. Will we be able to connect with the tenants / prospective tenants of the property in a way that will build personal relationships, drive tenant retention and minimize vacancy rates?
Part of the answer to this question will be addressed during staffing because tenants' main interactions with management and ownership come through the on-site staff. Owners must take this a step further by prioritizing this area and putting property staff in positions where they can succeed in this area. This can be achieved by making sure that proper tenant relations and engagement policies are put in place. Owners need to ensure that tenants feel that management is not only accessible but also responsive to their requests and needs. Likewise, the tenants of the property need to feel that ownership is connected and engaged. The more personal the relationship is with each tenant, the less likely they leave the property. Similarly, with prospective tenants, owners want them to feel like they are coming into a building that is well maintained and know that they will be taken care of as a tenant of the building—in either case, building personal connections is key, so that the tenants trust the building owners and management. This will drive tenant retention and reduce overall vacancy in the long run.
If struggling in this area, an owner should consult with a third-party leasing agent, preferably one with a high level of knowledge in the local market. Effective third-party leasing agents can consult on how to improve tenant satisfaction and engagement. In addition, they will know how to improve the state of the property to be more attractive to prospective tenants. Although they will charge leasing commissions, the investment may be worthwhile if tenant satisfaction and rental rates are both increased.
3. Do we have a competent accounting and reporting function in place?
In many cases, the accounting and reporting function is undervalued and often overlooked when owning and operating a property. Having a high-level accounting function will not only create value for the owner but also support all the other functions at the property. Accounting works hand in hand with the property staff and plays a key role in accurate billing and timely collections. In addition, accounting makes sure all property expenses are recorded accurately and paid on time. There are few things that hurt the reputation of an owner and manager more than sending inaccurate bills to tenants and paying vendors late. When these two things are happening, the negativity associated tends to spread quickly and there is a trickle-down effect to other aspects of the property.
Making sure ownership always has visibility into the state of the property is also an important responsibility of the accounting and reporting function. Periodic reports should be structured in a way where ownership can efficiently evaluate the state of the property and make decisions accordingly. Accounting has the responsibility of communicating with the owner when budgets are not being adhered to or when areas in the budget can be optimized. Along the same lines, the accounting team should be aware of any debt covenants that apply to the property and always ensure lender reporting requirements are submitted in a timely fashion and accurately. A competent accounting team will not just give owners a "data dump" but will provide meaningful advisory support in operating the property. An accounting function that truly excels will take its advisory role to the next level and provide the owner with recommendations on more complex items. Some examples of these items include purchase price allocations, cost segregation studies, and other strategies to achieve optimal results from a tax perspective at the ownership level.
Once the owner has evaluated and decided on how they will address operations, tenant relations, and accounting, the final piece of the puzzle is to ensure that all three can work together in synergy. Each area should be in constant communication and support the others in their functions. If a property owner can achieve high performance in all three areas and have them work seamlessly together, the newly acquired property is more likely to be successful.
Arturo Cepero is the CFO of Novello Financial Group.