In the real estate world, the acquisitions department plays an essential role in identifying and acquiring properties with investment potential. This process is carried out with both a financial and market focus, seeking to maximize returns and minimize risks.
The department is responsible for assessing all macroeconomic and exogenous variables that may affect the property’s cash flow, such as rent growth, expense growth, tax changes, and other factors. This includes understanding the potential for rent bumps, which is the ability to increase rent through renovations to a higher, but still reasonable, level given market conditions. This is one of the most important variables, as we operate on value-add projects.
Step-by-step lead generation
The process begins with the generation of leads, which are property offerings that come to the department from different brokers. Each lead is subjected to a preliminary evaluation to ensure that it meets certain criteria, such as: location, property type, value, submarket demographics, vintage, number of units, and value per door (guidance), among others.
Preliminary quantitative and qualitative analysis
Upon passing the preliminary review, the broker will be asked to provide additional information about the lead. This includes data such as the T12, which is the property’s financial performance over the past 12 months; the rent roll, which provides more specific property information, such as the occupancy rate, rent value, and unit type; and an offering memorandum or OM, which provides a more detailed overview of the property, including its main features, photos of both the interior and exterior, and market or submarket specifics.
Once this information is obtained, along with a financial evaluation of the property’s preliminary financial statements, in which revenue, costs, and potential opportunities to improve cost efficiency are analyzed, it is determined whether the property is suitable to continue with the process and whether the market characteristics align with our investment thesis.
Underwriting – In-depth assessment
After the preliminary analysis, the remaining properties undergo a more in-depth evaluation, where variables such as rental rate (the ratio of rental income to the current sales price), ROI (return on investment), type of renovation required, and target sales price are analyzed.
In the real estate industry, properties that pass the initial screening are moved to the underwriting phase. During this phase, macroeconomic and microeconomic factors, as well as financing and budgeting considerations, are thoroughly examined to determine the investment’s feasibility. A property tour is also conducted to inspect the property’s physical condition, conduct interviews with the real estate agent and property managers, and gather additional information that may influence the decision-making process.
LOI Committee and Due Diligence
After the tour, the acquisition team meets to scrutinize the data and identify comparable properties in the market that support the investment. The acquisition team’s findings provide the basis for drafting a Letter of Intent (LOI). The LOI is submitted to the broker, and if accepted, the “Highest and Best” phase begins, during which updated financial documentation is exchanged. If the offer is attractive to both parties, the due diligence process begins, where both the construction team and the asset management team review each aspect of the property in detail to ensure that the business is profitable and viable.
Finally, a purchase and sale agreement or PSA is signed, finalizing the acquisition of the property. Once the transaction is complete, work on managing and improving the property continues, while the acquisition department begins the process anew, analyzing leads and reviewing all underwritings to continue the company’s growth in number of assets under management.
Relationship between Capital Markets and Acquisitions Department at Apex
A close relationship between Apex’s Capital Markets department and Acquisitions team is essential for success. These two areas collaborate synergistically, sharing information, knowledge, and strategies to maximize investment potential and minimize associated risks. This partnership is not only valuable, but also critical for making informed and sound decisions in the complex world of real estate.
The collaboration begins with a joint analysis of the current market conditions, which will serve as input for the acquisitions team’s models. The Capital Markets team provides insights into current financing conditions, including variables such as interest rates, institutional investor risk appetite, inflation, and employment.
Determining the maximum level of leverage possible is a critical factor in the evaluation of an acquisition. The Capital Markets team identifies how much debt is prudent to assume based on market conditions and investment objectives. This figure becomes a fundamental component for structuring the offers made by the Acquisitions team.
LOI and Private Equity
One of the most significant aspects that connects both areas is the private equity fundraising process. The information generated during the Letter of Intent (LOI) committee process is the basis for attracting institutional investors and soliciting their feedback. The Capital Markets team plays a vital role in this process by establishing relationships with potential investors, presenting the investment opportunity, and managing the financial discussions that can lead to the acquisition of private equity in a project. This collaboration is essential, as the ability to perform underwriting does not guarantee success if both the debt and equity necessary cannot be secured.
Feedback and review
This collaboration is not only based on sharing information, but also on receiving feedback. The Acquisitions team uses the knowledge and insights of Capital Markets to refine their strategies and make informed decisions. Discussions between both teams often lead to adjustments in financial structuring and investment selection, ensuring that each acquisition is backed by a sound strategy and adequate financing.
In summary, the close and collaborative relationship between capital markets and acquisitions department in the real estate market is essential for identifying, evaluating, and successfully acquiring properties with investment potential. This partnership strengthens decision-making, optimizes financial structure, and maximizes investment opportunities, ensuring that each acquisition is a key piece in the puzzle of business success.