Investment Policy & Procedures
A highly selective investment policy has been established by EDM. Investments are generally limited to four property types: office buildings, retail centers, industrial properties and apartments. Hotels, under certain circumstances will also be considered. Certain higher risk property types, and special purpose properties (i.e. resorts, conference centers, etc.), are excluded.
The detailed evaluation of candidate properties is a complex process employing a broad range of criteria. These relate to the physical characteristics, location, lease structure, financial structure, negotiated purchase price and terms, market strength, demographic and economic growth expectations and other characteristics of each property.
EDM generally seeks opportunities for an advantageous purchase price and significant gain in value added through aggresive hands on management. Such opportunities may include, for example: an additional leaseup requirement, additional development potential, cure of deferred maintenance in a sound property, improvable lease structure or merchandising mix (in the case of shopping centers), a distress sale or foreclosure and other situations which are advantageous or will yield to sound management practices. Properties with major problems of any kind are avoided.
Some of the criteria which are applied in property evaluation are listed below:
2. Properly written escalation clauses.
3. Demonstrated balance of lease terms to avoid excessive risk of market cycles, with staggered lease expirations.
4. Acceptable impact of renewal options or other concessions which may limit further income. A strong emphasis is placed on effective
rents, rather than face rents.
5. Leases should be generally well structured and tenants must be credit-worthy. Single tenant, net lease buildings will be avoided, unless
the lease exceeds the projected holding period or downside risk at least expiration is small.
Acquisition Policies and Criteria
Appraisals – EDM usually obtains appraisals, including "stabilized occupancy" appraisals, for Properties in the lease up stage in order to aid in the determination of the fair market value of each Property to be acquired. The appraisals are prepared by independent appraisers who are affiliated with the American Institute of Real Estate Appraisers and have received the Member of Appraisal Institute MAI designation. Each property is purchased at a price which, when added to any fees paid in connection with the acquisition, is no greater than the fair market value of the Property as determined by the appraisal.
Acquisition Procedures – Acquiring properties that perform successfully requires highly developed skills, techniques, knowledge and experience, particularly in the areas of: (1) location of available properties, (2) rental property economics and operations, (3) property analysis and valuation, (4) real estate financing, (5) construction monitoring, (6) investment economics, (7) assessment of demographic, political and economic trends, and (8) legal and business practices relating to contracts of sale and title closing. The final decision to purchase a property at a given price and terms is a judgment made as to probabilities as well as to facts, arrived at partly by subjective and intuitive conclusions, as well as by through research, objective findings and experience.
Location of Properties – The following procedures are most productive and generating suitable property offerings and, therefore, are utilized on an ongoing basis:
Screening – Offerings of properties are initially screened by officers and employees of EDM and its affiliates. During this process, properties not meeting basis criteria are eliminated from further processing. Factors considered include location, type, size, architectural design, quality of construction, the track record and reputation of the builder, area trends, accessibility, credibility of the offering source, and the gap between asking price and probable value. Properties that preliminarily appear to qualify are further reviewed upon obtaining all required data and documentation. Analysis of proposed rent schedules, income, expenses and replacement costs is made at this stage, as well as projections as to probable cash flow and potential for increased income and value. Local economic and other trends are also evaluated. Following this, a preliminary offer is structured and conveyed, verbally or in writing, to the seller, subject to a physical inspection, an audit of income and expenses, if applicable, verification of other data, legal reviews of all documentation, and the ability of the parties to conclude a formal contract of sale setting forth all of the conditions of the purchase, including title conditions.
Negotiations and Inspection – Should it appear probable that such a preliminary offer, possibly with acceptable modifications, will be approved by the seller, a preliminary physical inspection of the property and its location is made. The physical inspection primarily focuses upon the immediate neighborhood, the general area, the conditions of the property, its plans, specifications, permits, approvals and construction, its features and general appeal. Architects, structural engineers and other consultants and may be hired to assist in this process. A survey of comparable properties or other relevant data regarding comparable properties is also reviewed to determine market conditions and evaluate competition.
Contract for Sale, Confirmation and Verification – EDM then negotiates and signs the formal contract of purchase and sale, which sets forth the price and terms, as well as covenants, warranting and representations of the seller and the conditions of closing. The representations, warranties and covenants will generally survive closing of the acquisition. Audits would then be undertaken of rental income and certain of the operating expenses on an historical basis and an investigation of such other matters, including environmental, as EDM deems appropriate. Outside counsel also reviews documentation, such as a land survey, building plans and specifications, service agreements, occupancy permits, leases, insurance policies, prior title reports, and other relevant documents. The audit, investigation and review may again result in price renegotiation and revision as a result of the disclosures or, possibly, a termination of the transaction.
Closing – The closing of title normally takes place within 60 days of the date of the contract, but may be accelerated or adjourned under varying circumstances. Under no circumstances, however, will the transaction be closed unless all material conditions are met, the warranties and representations of the seller are found to be substantially accurate, the covenants are complied with and the audits, if any, and investigations satisfactorily completed.
The detailed evaluation of candidate properties is a complex process employing a broad range of criteria. These relate to the physical characteristics, location, lease structure, financial structure, negotiated purchase price and terms, market strength, demographic and economic growth expectations and other characteristics of each property.
EDM generally seeks opportunities for an advantageous purchase price and significant gain in value added through aggresive hands on management. Such opportunities may include, for example: an additional leaseup requirement, additional development potential, cure of deferred maintenance in a sound property, improvable lease structure or merchandising mix (in the case of shopping centers), a distress sale or foreclosure and other situations which are advantageous or will yield to sound management practices. Properties with major problems of any kind are avoided.
Some of the criteria which are applied in property evaluation are listed below:
- It is important that the buildings are of good construction quality with regard to both materials and procedures used and properties must be judged to embody good planing and enduring design in relation to established standard for efficient building operation. Building systems should be found to be mechanically sound. Extensive renovation, other than cosmetic, will, for the most part, be avoided.
- The market should demonstrate strong regional and local absorption characteristics and should evidence a long-term employment growth trend. Market growth should be based on well understood economic and demographic factors, and single industry dependence is avoided. In general, only the downtown areas of medium to large cities and suburban areas of major metropolitan markets with adequate leasing depth will be considered.
- It is important that the property be found to be competitively strong in its market. This means that the facility should be deemed superior for the use intended, with the rents at or below prevailing market levels over the business cycle. The strategy reduces market risk, since well located, high-quality properties can usually be kept well leased in an underabsorbed market, provided that rent levels remain competitive.
- Operating Expenses: A comprehensive diagnosis is made of the physical state of each property, with considerable attention to possible deferred maintenance and needed improvements. A one-year operating budget and five-year capital and operating plan I normally developed for the property by the management group.
- Lease structure is exceptionally important in achieving superior returns, while controlling investment risk. The realization of increasing annual cash flows is a major objective. Leases are generally evaluated in terms of their ability to provide:
2. Properly written escalation clauses.
3. Demonstrated balance of lease terms to avoid excessive risk of market cycles, with staggered lease expirations.
4. Acceptable impact of renewal options or other concessions which may limit further income. A strong emphasis is placed on effective
rents, rather than face rents.
5. Leases should be generally well structured and tenants must be credit-worthy. Single tenant, net lease buildings will be avoided, unless
the lease exceeds the projected holding period or downside risk at least expiration is small.
Acquisition Policies and Criteria
Appraisals – EDM usually obtains appraisals, including "stabilized occupancy" appraisals, for Properties in the lease up stage in order to aid in the determination of the fair market value of each Property to be acquired. The appraisals are prepared by independent appraisers who are affiliated with the American Institute of Real Estate Appraisers and have received the Member of Appraisal Institute MAI designation. Each property is purchased at a price which, when added to any fees paid in connection with the acquisition, is no greater than the fair market value of the Property as determined by the appraisal.
Acquisition Procedures – Acquiring properties that perform successfully requires highly developed skills, techniques, knowledge and experience, particularly in the areas of: (1) location of available properties, (2) rental property economics and operations, (3) property analysis and valuation, (4) real estate financing, (5) construction monitoring, (6) investment economics, (7) assessment of demographic, political and economic trends, and (8) legal and business practices relating to contracts of sale and title closing. The final decision to purchase a property at a given price and terms is a judgment made as to probabilities as well as to facts, arrived at partly by subjective and intuitive conclusions, as well as by through research, objective findings and experience.
Location of Properties – The following procedures are most productive and generating suitable property offerings and, therefore, are utilized on an ongoing basis:
- establishing and maintaining direct contacts with unaffiliated owners and developers of properties;
- systematic soliciting of real estate brokers nationally, including those known through personal contacts; and
- placing advertising and trade and financial publications.
Screening – Offerings of properties are initially screened by officers and employees of EDM and its affiliates. During this process, properties not meeting basis criteria are eliminated from further processing. Factors considered include location, type, size, architectural design, quality of construction, the track record and reputation of the builder, area trends, accessibility, credibility of the offering source, and the gap between asking price and probable value. Properties that preliminarily appear to qualify are further reviewed upon obtaining all required data and documentation. Analysis of proposed rent schedules, income, expenses and replacement costs is made at this stage, as well as projections as to probable cash flow and potential for increased income and value. Local economic and other trends are also evaluated. Following this, a preliminary offer is structured and conveyed, verbally or in writing, to the seller, subject to a physical inspection, an audit of income and expenses, if applicable, verification of other data, legal reviews of all documentation, and the ability of the parties to conclude a formal contract of sale setting forth all of the conditions of the purchase, including title conditions.
Negotiations and Inspection – Should it appear probable that such a preliminary offer, possibly with acceptable modifications, will be approved by the seller, a preliminary physical inspection of the property and its location is made. The physical inspection primarily focuses upon the immediate neighborhood, the general area, the conditions of the property, its plans, specifications, permits, approvals and construction, its features and general appeal. Architects, structural engineers and other consultants and may be hired to assist in this process. A survey of comparable properties or other relevant data regarding comparable properties is also reviewed to determine market conditions and evaluate competition.
Contract for Sale, Confirmation and Verification – EDM then negotiates and signs the formal contract of purchase and sale, which sets forth the price and terms, as well as covenants, warranting and representations of the seller and the conditions of closing. The representations, warranties and covenants will generally survive closing of the acquisition. Audits would then be undertaken of rental income and certain of the operating expenses on an historical basis and an investigation of such other matters, including environmental, as EDM deems appropriate. Outside counsel also reviews documentation, such as a land survey, building plans and specifications, service agreements, occupancy permits, leases, insurance policies, prior title reports, and other relevant documents. The audit, investigation and review may again result in price renegotiation and revision as a result of the disclosures or, possibly, a termination of the transaction.
Closing – The closing of title normally takes place within 60 days of the date of the contract, but may be accelerated or adjourned under varying circumstances. Under no circumstances, however, will the transaction be closed unless all material conditions are met, the warranties and representations of the seller are found to be substantially accurate, the covenants are complied with and the audits, if any, and investigations satisfactorily completed.