Evaluating Operators
Hi All,
We've been so focused on due diligence on short term loans in the real estate world that we feel pretty comfortable with the system. Everything is asset based and underwritten with the worst case scenario in mind. However, I've had a few people ask about how to evaluate equity positions. These are going to be riskier, because you have to underwrite the deal as well as those who are going to be running the asset.
While doing some research, I ran across another capital raising company who offered their due diligence framework as a lead magnet. It, of course, is biased and uses language to push you towards working with them but I stripped it all out and created a generic template. I wanted it share it with you all:
Investment Due Diligence Framework
A high level checklist for evaluating operators, funds, and passive investment opportunities.
1. Firm History and Leadership
Founding date and evolution of the firmExperience of key principalsTotal transaction volume and assets managedEvidence of learning and refinement across market cycles
2. Investment Strategy and Edge
Primary investment focus and target asset classesCurrent asset allocation approachUse of vertical integration or in house managementDeal sourcing strategy including off market accessDurability and scalability of competitive advantages
3. Market and Acquisition Criteria
Clear acquisition triggers and value creation thesisGeographic focus and supporting demand driversPopulation and job growth trendsVacancy rates and competitive supply analysisDepth of market research and underwriting discipline
4. Operations and Asset Management
Planned value creation initiativesCapital improvement and operational optimization strategyReporting cadence and performance review processCost control systems without quality degradation
5. Financial Structure and Debt Strategy
Typical leverage levels and LTV targetsDebt philosophy conservative versus aggressivePreference for fixed rate and long term financingRisk management approach for interest rate changesAdvance planning for refinances and maturities
6. Exit and Capital Recycling
Stabilization benchmarks and cash flow targetsIdentified buyer profile for exitDisposition strategy and timing disciplineCapital recycling plan for future growth
7. Legal, Regulatory, and Oversight
Litigation history reviewRegulatory and zoning compliance processQuality of third party advisorsLegal counsel, fund administration, audits
8. Investor Relations and Transparency
Reporting frequency and clarityAccess to financial statements and auditsDefined communication channelsDirect access to decision makers when needed
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Evaluating Operators
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Education for passive real estate investors who want clarity and confidence in understanding deals, operators, and structures.
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