09/01/1999

Streamlining the Due Diligence Process

By Todd Zeldin and Harris Sugarman

ACG Professionals, Inc.

In most real estate transactions the decision making process must be completed in a relatively narrow timeframe. Typically potential purchasers are under extremely strict time deadlines to make their decisions and, as a result, they rely heavily on information provided by the seller. Because it is essential to process data cost effectively and quickly without compromising the data integrity, streamlining the due diligence process can be a valuable and cost savings tool. Through a streamlined and efficient fact finding process, you improve data integrity, reduce costs, decrease turnaround time and ultimately aid in making better acquisition decisions.

Although benefits of streamlining any process are mostly obvious, nonetheless the real estate industry has often ignored advances in technology in the due diligence process. For example, in most situations the due diligence process is completely independent from the asset and property management and accounting processes. This results in input redundancy and data integrity issues. During the due diligence process a company may outsource much of the work. Then, once the property is acquired they repeat much of the process again leading to inefficiencies and errors due to repeat efforts. Although companies recognize these inefficiencies, these redundancies are seen as an intrinsic part of the process. To remain competitive this thinking will need to change; however, before you can improve a process, you first must analyze it.

Although there are several due diligence steps including environmental and structural analyses, with respect to financial due diligence a company's acquisitions staff typically goes through the following process: receives a hard copy of information from the seller; models the proposed project using discounted cash flow software tools like ARGUS, DYNA or PRO-JECT; performs market and feasibility analyses; abstracts or summarizes leases and prepares estoppel certificates; and reviews historical financial statements. Although much of these areas may be outsourced, once the company completes their analyses and the deal is finalized they hand off the information, usually in a hard copy format, to the asset managers and move to the next deal that awaits them. At this point the asset managers usually repeat much of the process and then enter the same information into their accounting system. Since the software systems utilized for evaluating and forecasting a portfolio are different and independent from the accounting systems, data input redundancies are prevalent, which can result in critical errors affecting cash flow analysis.

Utilizing advances in software and technology improves information flow. Receiving the seller's information electronically and integrating information gathered, scrubbed and stored during the initial due diligence process into property management and accounting systems dramatically reduces data input redundancies. This is achieved by focusing on developing bridges between applications and including people on the acquisitions team in the on-going asset management process.

A specific deal recently completed by ACG Professionals, an Atlanta-based consulting firm, included importing property management data from the Skyline accounting system and into an internal proprietary database thereby eliminating redundant data entry. After the electronic import of data, the due diligence staff audited and reviewed the information and reconciled it back to the hard copy leases. Post "scrubbing" the data was uploaded into multiple ARGUS models by our analytical services division to perform the requisite DCF analysis. At this point, the property management data, including monthly billable expenses, was then available for the client to upload into their accounting system and the ARGUS models were used as the start of their on-going budgeting process.

In the example above, the following list is just a sample of tenant specific data involved that would have otherwise required duplicate efforts:

* Generally these terms are difficult to electronically import or export.

Many companies outsource the different components entailed in the due diligence process because they are simply not equipped to process all the information independently. In choosing an outsource partner, look beyond the specific task you have historically requested that firm to provide. For example, if you outsource lease abstracting, ask the consulting firm if they can provide you with analytical reports to generate reports such as straight-line rent, exposure analyses by tenant square footage or base rent and income-in-place reports. Additionally, instead of receiving hard copies of abstracts, request that the abstracts be provided to you in electronic form. The former simply results in the data becoming obsolete and will only lead to future input redundancies and potential inaccuracies. The latter provides a streamlined process allowing for the ongoing input of recent tenant information and the generation of the most up to date analytical reports.

Most companies recognize input redundancies in the due diligence process but are not willing to alter their operation. Typically they perceive reviewing their process as too time consuming, too expensive or simply unavailable under the guidelines in which they must operate. The process is pretty well defined but is clearly inefficient. In an industry that focuses heavily on consummating the deal over a short timeframe, it is not surprising that more time and resources are not spent on developing a more efficient long-term plan.

Now is the time to plan for the future. It is not enough to implement new technologies in a piecemeal fashion - you must develop a strategy for the future so that you can leverage new technologies in an organized, cohesive manner and not disrupt your operations. With the opportunities technology present today, the highest-quality service possible is expected and demanded. To be competitive, real estate companies must view the acquisition, management and ultimate disposition as one entire process – from cradle to grave. Those companies who invest the time and resources to streamline the due diligence process will process data more efficiently, accurately and cost effectively and in turn gain the competitive advantage.

If you would like to address any interests, you may contact Todd Zeldin at tzeldin@acgpro.com.