What We Do: Due Diligence for Investors in Real Estate Secondaries

CREModels routinely provides critically important due diligence in the growing secondary market for limited partnership (LP) interests in real estate deals. Clients include large and small investors, fund managers and their advisors. 

CREModels’ services for real estate secondaries include:

• due diligence
• historical investment performance
• net asset value (NAV) analysis
• document abstraction
• financial modeling
• acquisition/disposition underwriting

Actionable intelligence for investors in real estate secondaries

When LPs are evaluating whether to acquire an equity interest in a real estate deal through an initial offering, they need a clear and accurate picture of the potential risks and rewards involved.

Arguably, the need for due diligence is even greater in the secondary market. When investors are looking to acquire equity in primary offerings, they typically have abundant access to updated and detailed offering memorandums, formal business plans and other forms of disclosure.

Disclosures for secondary offerings, whether LP- or GP-driven, may be comparatively vague. Our analysts dig into the deal to provide LPs with an objective, data-driven perspective.

They are skilled at examining the actual track record of the investment, including its performance relative to projections in the OM and later communications to investors. How do the actuals stack up in comparison to the projections? Has the GP been able to hit its targets, distribute cash, and grow asset value as expected? 

CREModels engagements for real estate secondaries routinely include:

Updating the current status and performance of the asset.

Dramatic shifts in the U.S. real estate marketplace have underscored the need for LPs to receive updated information about prospective investment assets. Tapping into multiple data sources and asking hard questions, our analysts protect LPs’ interests by stress-testing older comps, valuations, traffic and sales statistics, and other information relating to the property. They provide LPs with updated reports on the business plan, rent rolls, partnership agreement and contributions/distributions. They know to ferret out risk areas that, either on purpose or by mistake, tend to be hidden or undisclosed.

Investors in real estate secondaries need to understand why the departing LP is selling its position. Our due diligence work can help answer that question by revealing whether declining asset performance, pending tenant vacancies, imminent refinancing deadlines or other potential problems could be part of the equation.

Conducting a deep dive into the performance track record of the general partner (GP)

This inquiry includes examining documents such as quarterly performance reports issued by the GP to the LPs over the past few years. To uncover potential “shadow risks,” our teams may also investigate the status and performance of other, potentially cross-collateralized real estate assets held by the GP.

If the ownership history of the GP includes capital calls, it is important to understand why these were held. Oftentimes, the waterfall includes rules for how capital calls should be handled. In conducting due diligence on behalf of real estate secondaries, our analysts can review the GP’s track record of managing cash flow during capital calls and overall approach to preparing for these events, as well as the potential implications of what has occurred to date for the remaining life cycle of the asset

Gauging waterfall compliance

We review the GL and all historical capital accounts with a view toward ensuring that payments required in the waterfall agreement have been made according to the agreed-upon provisions.

Running ‘what if?’ analyses

Our teams examine factors such as the waterfall requirements, property performance, trade area dynamics, and key documents—including expiration/renewal dates, kick-out clauses and other important details in retail, office or industrial leases—to provide LPs with a sense of how they will be affected by fluctuations in the property’s cap rate, occupancy, traffic, co-tenancy, and more. Predicting the future with total accuracy is impossible, but multi-scenario “game-planning” can give strategic-minded real estate LPs a stronger sense of the investment’s potential upsides and downsides.

Clarifying distribution requirements

GPs and LPs tend to employ their own independent, slightly different accounting methodologies for the asset. This can lead to drift among the parties on the calculated distribution (for example, differences in calculated interest accrual because the LP books entries on one date, the GP on another). Our analysts have broad experience in reviewing the waterfall trackers employed by GPs and LPs alike. By doing so, including analyzing the financial data and files, they can identify and investigate areas of disagreement and assist the parties in coming to a mutually acceptable, agreed-upon view.

Understanding loan covenants

When the market is roaring, many decisions are tantamount to winning either first or second place—both are essentially “good results.” When the economy is more uncertain, partners may be forced to choose between multiple suboptimal outcomes. Under such circumstances, it is especially important to be clear about the specific conditions that could trigger a default in the loan and potential legal action by the lender. Working on behalf of LPs, our analysts can produce easy-to-digest reports on the deal’s debt structure and critically important loan covenants and potential default triggers.

Real estate secondaries market services for GPs

General partners (GPs) also rely on CREModels as a trusted advisor for secondary-market real estate transactions. Managers of faster-paced, open-ended funds, for example, find that they can access capital more quickly by coming to the table with complete, up-to-date due diligence prepared for them by the CREModels team.

When investors have fewer questions about the asset and fund, deals are more likely to proceed in a timely fashion. This, in turn, helps keep the capital stack intact and guarantees that partners get the liquidity they need, when they need it.

And when funds are in greater demand due to their more efficient management, this gives GPs a wider array of options and, therefore, more control over who they choose to work with. It also leads to new deals down the line.

CREModels: a trusted advisor for investors in real estate secondaries

CREModels occupies a unique niche in the rapidly growing market for LP interests in real estate transactions. Our highly trained analysts have broad experience in conducting due diligence across all real estate sectors and throughout the capital stack. They are adept at identifying and investigating direct and indirect areas of risk related to the waterfall and other complex, critically important documentation. Moreover, CREModels’ sharp focus on leading-edge technology in commercial and residential real estate guarantees an efficient and data-driven process. At CREModels, we are invested in you. Our formula for winning repeat business is straightforward—use every resource at our disposal and come together as a team to maximize our clients’ ROI.