What Does HPP Look For When Buying An Asset? (Part II)
29 Sep 2017
In our last blog, I started sharing with you what we consider the ‘secret sauce’ of how we approach acquisitions. We have been very blessed over our careers, but at the same time, we do believe that focus and discipline have contributed mightily to our success and growth. The late Steve Jobs, former CEO of Apple, famously said that “People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are… I’m actually as proud of the things we haven’t done as the things I have done.”
Real estate is the same in that way: we say ‘no’ to hundreds of properties and investment strategies for each single deal that we buy.
Without further ado, here is the rest of the of our acquisition criteria we look for when buying an asset:
Properties With “Some Hair” On Them
Being value-add investors, the old saying of buying “the worst building on the best block” is quite true, and we typically don’t buy the best-looking mare in the corral. However, fixing correctable issues can result in increased tenant demand, higher rents, rapid lease up and value accretion.
Our experience has proven that environmentally impacted properties can provide excellent opportunities once we perform rigorous due diligence to properly assess and mitigate the potential risks.
Similarly, properties that carry significant deferred maintenance can also present excellent opportunities, provided one conducts a thorough investigation and accurately prices the planned rehab that will be required in order to attract a wide range of tenants.
With deferred maintenance, we sometimes see rookie buyers making the mistake of not carrying a big enough contingency. Significant property renovation is a fact-finding and fact-facing process that is not for the faint of heart (or the slim of wallet). We sometimes carry contingencies as high as 25%, not because we don’t know what we are doing but precisely because we have come to expect the unexpected (call me for some interesting war stories including human remains discovered — I was told they are technically called “cremains”)
But, be forewarned, some properties just can’t be “cured”. These include properties with unknown contamination (let someone else have the thankless task of characterizing the site), structural issues (rare but can be very expensive to correct, such as “heaved” freezer building floors) or properties that are attractive but frenetic buyer bidding drives the price too high. A high basis can’t support the additional costs needed and pushes yields too low to justify the additional risk of a value added strategy.
“Heads we win a little. Tails we win a lot.”
Capital is certainly a finite resource, and at Hager Pacific we use only our own money for a deal. Therefore, we need to ensure that we are using our capital wisely. In order for us to invest in a deal, we must receive a return that exceeds a similar risk adjusted return in other investments. In doing so, we must first make sure that we preserve our capital. One of our greatest guiding principles is to not lose money in a deal. We subscribe to the maxim: “Heads we win a little. Tails we win a lot.” If we make an investment knowing that we have the upside of buying Southern California real estate without a real down side, then it is a chance worth taking.
Bear in mind that acquisition criteria will vary based on the specialty, focus, or goals of the investor. However, when seeking to leverage commercial real estate ownership and management opportunities, the above listed criteria – in addition to those we published in August – have worked well for us. They have translated into exceptional value for our portfolio.