As a multifamily owner as well as a property manager for 3rd parties, it’s easy to get lost in the day to day chaos of our business and forget that there are others out that I can learn from. I didn’t grow up in the real estate business. In my former life, I was a principal in a successful publishing and conference company. My conference business was based on the proposition that meeting face to face with your peers in the industry was invaluable. I maintain that that premise holds true in any business, including multifamily real estate.
Yesterday I attended a seminar sponsored by CHIP (Community Housing Improvement Program) in conjunction with the NYCLA (New York County Lawyers’ Association). If you are not familiar with CHIP, it’s a trade association targeting owners of rental housing in New York City, with a Board of Directors that includes some very major players in the business. The group runs a number of annual educational and social events, publishes a very useful monthly newsletter, and does significant lobbying for the industry. Attending this event (which, if I was a lawyer, would have also netted me continuing education credits as well), cost me merely $35.
I find that meetings like this are a valuable way of both benchmarking what I do know and invariably supplementing that knowledge with something that I hadn’t previously known. Yesterday’s seminar was entitled “Perceptions of a Multi-Family Real Estate Deal” and featured a panel that included two representatives of well established law firms, an institutional real estate investor, a commercial lender, and a title company representative. Given the focus of the talk, a good deal of time was spent talking about buyers’ due diligence prior to closing on a transaction. What I discovered was how poorly served I’ve been by the smaller one or two-person law firms I’ve used in the past on my own deals. While seemingly quite competent to negotiate my contract of sale, review loan documents, and make sure title was in order, I now realize that none of these smaller firms really had a thorough process or check list relating to due diligence. As a result, I definitely made mistakes in the past that I might not have made with proper council. On the other hand, I imagine the larger firms charge higher fees, so there’s always a trade off.
The attorney presentations outlined a broad array of information that they ideally would like their clients to obtain before closing on a purchase. Some of it was admittedly unrealistic, particularly in today’s sellers’ market, where a family-business seller is likely to move onto the “next buyer” if pushed too hard for information they think is overreaching. For instance, most sellers will decline a request of tax returns and perhaps bank statements as well. However, having a law firm there to make sure that things like petroleum bulk storage certificates or DEP registrations are all in order, to make sure that you get your insurance agent to obtain a loss run on the building you plan to buy to determine future insurability, and to obtain not just a DCHR rent registration report, but also information on all docketed items in DHCR’s records, is certainly comforting.
One of the speakers, Nicholas Kamillatos of Rosenberg & Estis, discussed how he looks at a deal from the seller’s perspective. He suggested that if you are a good operator who is purporting to be selling a “clean building,” then your behavior within the due diligence period needs to support this. That means readily producing documents and files that are clear and organized. Your financials should be consistent with the figures in the broker’s work-up. Be proactive and have DHCR rent registration printouts ready in advance. Make your own checklist of permits, licenses, and inspections that are required for your building and have supporting documentation lined up to show that everything is in good order. Have your tenant files compiled so that a prospective buyer can easily verify that your registered rents are actually legal rents.
The most interesting piece of information I gained from Kamillatos’ presentation relates to the idea of a termination clause vs. a time of the essence (TOE) clause in your contract of sale. As a buyer, I always was worried about a TOE clause and what would befall me if I wasn’t ready to close on time. However, as Kamillatos pointed out, to enforce a TOE clause, the seller must show the court that they have satisfied absolutely ever obligation that was represented by the seller in the contract of sale. As a result, a good buyer’s attorney can generally find some technicality to nullify the enforcement of the TOE clause. Thus, if you get a sophisticated buyer who is possibly looking to tie you up indefinitely, hoping really to just flip the deal, the TOE clause can come back to bite the seller. Kamillatos argued to opt for a termination clause instead, so that you have the option to terminate after a specific passage of time, thus voiding the contract so you can move onto the next prospective buyer. (Though not suggested in the seminar, I wonder if you could write a contact that included elements of both a TOE and a termination clause, so you could size up your buyer and then decide which route to go?)
Michael Soleimani of Westbrook Partners, a CHIP board member, offered his views as an institutional investor. Though his firm has the competitive advantage of being able to close a deal in seven to 10 days, without financing, I learned that they can’t be more competitive on all deals. Because of the profile of their investors, including insurance companies and pension funds, they have to do a much deeper level of due diligence than we have to and can’t necessarily compete on many deals that family-owned investors would consider. This includes buildings with a high percentage of regulated apartments. Westbrook is more likely drawn to deals where there is a good percentage of market rate units, particularly where a long term owner hasn’t maximized his rent roll because he is more focused on preserving a consistent cash flow than increasing the absolute return on investment.
In addition to further insights I gained from the presentations and Q & A session, there was the added benefit of networking with my fellow attendees. There were several people I’ve gotten to know around the industry, from bankers, to brokers, to attorneys, to other owners that I bumped into at the meeting. Not only does getting out of the office help to cement these relationships, but it also helps further one’s reputation as an engaged, knowledgeable player in this industry–something that over time will certainly lead to referrals and new business opportunities.
NYC Multifamily Property Management - Tips from the Trenches 