All commercial real estate investments progress through three distinct stages, which together make up the asset ownership lifecycle. So, what are the three phases of a commercial real estate investment?
We differentiate them as acquisition, operation, and disposition lifecycle phases. The lifecycle of a commercial real estate investment can be a long one with many moving parts to keep in mind. Both new and seasoned real estate investors can benefit from a clear understanding of the ownership lifecycle, as each phase is characterized by unique objectives, risks, and rewards.
The first phase in any commercial real estate investment is acquisition. This begins by sourcing the right asset to fit the required return profile. Each investment firm has its own set of return requirements, strategies, and real estate class(es) in which it specializes. Our focus is on making core plus investments in suburban workforce multifamily housing.
At CEP, we evaluate dozens of leads each year but only undertake a comprehensive analysis on a few core plus investments that pass our initial screening. The business plan for a core plus asset is to generate stable cash flow for investors and increase the value of the asset over time. A typical plan may include steps to assess future market demand, estimate the return on investment for property improvements, and evaluate opportunities for new management to enhance revenues and better manage expenses. While creating a business plan, considerations such as market dynamics and desired purchase price are made. We then make offers on those assets where the business plan suggests we can make strong risk-adjusted returns. If our offer to purchase is accepted, we enter into contract with the seller, open escrow, and conduct final due diligence on the asset.
Due diligence is the investigation and audit performed to confirm the historical financial records of the asset. Due diligence provisions in commercial real estate can vary, but they generally afford a purchaser the right to enter the asset to inspect, examine, and test all aspects of the asset as the purchaser deems necessary. These investigations can include:
- reviewing title and survey
- inspecting the physical, environmental, and ecological condition of the asset
- physical inspections of all structures and mechanical systems located on and servicing the asset
If due diligence confirms the business plan is viable, the investment is funded and the acquisition is closed. We then immediately enter the Operation phase of the ownership lifecycle.
During this phase, we begin the execution of our business plan. Any property improvements or management changes are executed based on the schedule of the business plan. This phase requires experience to be able to identify an asset’s potential. There is a need to focus on how and when to effectively execute upgrades that deliver maximum results. The timeframe in which these changes are implemented vary depending on the business plan. Adding return to an asset can take years to fully implement which is an important reminder of why commercial real estate is best considered as a long-term investment.
CEP brings an operator’s mentality to the table in its role as manager of these assets, something we call “asset management alpha”. We do not just buy assets and leave it to third parties to manage. We bring our experience from over 30 years in multifamily property management to drive the day to day operations and optimize the economic performance of these assets over time. We see this as a marathon, not a sprint.
Within each business plan there is also an exit or disposition timeframe. Throughout the ownership of the asset, the market conditions are constantly evaluated to determine the best time to exit formaximized returns.
At CEP, we take the long view of investing (7-10 year horizons) knowing that somewhere in that timeframe we will find the optimal point to sell and reap the appreciation (increase in value) that we have garnered over time through the execution of the business plan. The goal of our core plus investment strategy is to produce balanced returns for our investors through a combination of cash flow and appreciation. These are lower risk investments when compared to short term value add investments, or investments in ground up development that deliver no cash flow and must rely entirely on quick asset appreciation (market timing) to generate returns for investors.
At CEP, we fund the investments by pooling our capital together with direct investments from individual accredited investors who have registered with CEP.
To learn more about direct invest real estate ownership check out our blog post.
If you would like to register with CEP so you can begin seeing investment opportunities from us