What you Need to Know About Acquisitions

After identifying a property, you will begin the acquisition process. Depending on what type of organization or company you have and where the property is located, there are different considerations and capacities needed throughout this phase.

Understanding the Process

During the acquisition process, you will need to make decisions that require development, finance, and legal expertise. It is essential to build a well-rounded team, which may include consultants, to move thoughtfully – and with agility.

Key Competencies for Acquisitions

Considerations & Challenges

In the process of moving from property identification to acquisition, you will need to undertake a series of activities known as due diligence to ensure that there are no unexpected problems with the property or sale that were not apparent when you initially evaluated the property. These activities will typically be required to satisfy lender or other funder requirements but should be part of your acquisition process regardless of requirements. You will need to work with 3rd party consultants to conduct most of these activities. Common due diligence practices include the following:

  • Auditing the property’s financials, such as income and expenses and/or profit and loss statements, to verify and identify inconsistencies.

  • Conducting a Property Condition Assessment or Capital Needs Assessment (discussed in more detail in the Rehabilitation brief.

  • Examination of current resident and commercial tenant leases to verify the terms, rent roll and schedules. If the property includes income-restrictions, this should also include a verification of resident income levels to identify any compliance issues.

  • A full physical walkthrough of every area and unit of the property.

  • An appraisal of the property’s current market value (the appraiser will typically be selected by your lender).

  • A title report to confirm the legal status of the property. This should also include a detailed map of the site, including improvements.

  • An Environmental site assessment (typically just a Phase I report) to ensure there are no unforeseen environmental hazards or concerns. Depending on the location of this site, this could also include other environmental reports such as seismic reports.

  • Your lender may wish to review documents related to your rehabilitation plans, such as building plans and an analysis of zoning and land use requirements.

In addition to due diligence for the property itself, lenders typically require some due diligence related to your organization as well. For example, they may require an audit of your financial condition or review your organizational policies, annual report and other documents.

In many markets, owners of many small and medium multi-family developments are expecting deals to close as quickly as 30-60 days. This means that you and your team need to be prepared to conduct due diligence and nurture critical relationships (see next section) before starting the acquisition process.

There are many factors that can contribute to the cost of acquiring a small or medium multi-family property, including location. If the property is in an asset rich neighborhood or market that is heating up, the acquisition cost will likely be higher, even if there are lower rehab costs. Conversely, a property in a neighborhood with softer market conditions will likely have a lower sales point. Older properties may also come with increased costs, both in terms of deferred maintenance needs and ongoing operations (i.e., high energy costs due to structural inefficiencies and/or older appliances).

This may be especially relevant for SMMF properties that have unreleased liens or have been informally sold or transferred in the past (including heirs’ properties). Research by the Center for Community Progress has shown these murky title situations are more likely to occur in low-income communities and neighborhoods with many senior households, which are also areas where preservation efforts can be particularly impactful (e.g., addressing blight or preventing displacement).

Appraisal gaps can occur due to inadequate market analysis, poorly estimated cash flow projection or, simply, a very strong real estate market. This can be a particular risk with unsubsidized affordable SMMF preservation, since it may be hard to find appropriate comparisons, especially in strong markets, where a property’s selling price may be determined by rents in newly constructed buildings or a different use. If the appraisal comes back less than anticipated, you may need to find additional equity or financing to cover the gap. One potential solution would be to seek a guarantee from a philanthropic funder, which may enable a Community Development Financial Institution or bank to offer a higher loan-to-value ratio.

The structure of your entity will also impact how you approach the acquisition process. If you are associated with a nonprofit organization, you will need to consider how your mission and client needs impact future operating costs. If you are acquiring a property for a cooperative ownership entity, you will need to contemplate how your cashflow will work when prioritizing affordability and what financial resources you can access. If you are a partner in a joint venture, it is critical to have clear conversations with your counterpart(s) around priorities, expectations, and any unique conditions.

Based on the circumstances, you may consider different funding sources to help you acquire the property (or properties) you have selected. Before applying for any specific source, it is critical to understand what compliance and reporting requirements they come with, especially when considering public sources. Common sources that may be appropriate when acquiring a small or medium multi-family site include:

  • Lines of credit

  • Bridge financing

  • Resources from a Community Development Financial Institution (CDFI)

  • Partnership with mission-aligned philanthropic partners

  • Property acquisition funds

In addition to securing acquisition financing, you will also need to identify funding sources for the redevelopment and life of your property. Sources may include state and local housing subsidies, bond financing, and tax abatements. To learn more, visit the Funding Sources Inventory tool for your region.

Property acquisition funds provide affordable, short-term loan products that often come with restrictions to ensure the development has an affordability component. These funds are especially important in hot markets and areas where speculative activity is occurring. These sources allow mission-driven developers to compete with their counterparts who have cash in-hand or greater access to other resources. Property acquisition funds can be privately, publicly, and/or philanthropically funded. They may be administered by a public agency or a community development financial institution. For example, the Atlanta Equitable Transit-Oriented Development Fund(link is external) is a partnership between the City’s economic development authority, Enterprise Community Loan Fund, and Low Income Investment Fund.

Relationships

Before and throughout the acquisition process, developing and managing relationships is critical. See the Engaging Stakeholders brief for additional information about these topics.

It is important to begin building trust with residents as soon as possible. If you are pursuing an occupied building, you may have the opportunity to engage with current residents during the due diligence phase. If so, you can use the opportunity to introduce yourself and, more importantly, hear about their needs, the condition of the property, and where otherwise unexpected costs might appear. However, it is also critical to remember that it will take time to build trust, especially as residents are faced with uncertainty surrounding their futures. Meeting with resident leaders is one way to connect with the broader property community; in some properties, there may be official resident organizations, but often residents are informally connected at smaller properties. In some cases, it may be more effective to contract with a local organization that has already established relationships with residents and, ideally, is knowledgeable of resources they may need during the upcoming transition.

While you understandably may need to keep some information confidential before a financial closing, honest and clear communication are still important.

Even if you are not able to hear directly from current residents – or if the property is vacant – you should also begin building or strengthening relationships with community partners. This may include:

  • Non-profit organizations that provide social services/resources to current or potential residents

  • Neighborhood associations

  • Local elected officials

  • Local government staff (i.e., planning, development, neighborhood services, housing department leaders)

Intentional engagement at this phase has several purposes. As described in the Property Management brief, you will likely need to coordinate with community organizations to provide resident services. During the acquisition phase, listening to community partners will help you better understand the neighborhood, resident and property needs, broader community needs, and the nature of the relationship between residents and former property owner/manager. This information can help you be more responsive to resident and community needs – and help you anticipate costs tied to redevelopment and/or resident services. Additionally, these stakeholders may also be advocates for you when navigating development approval processes.

If you are a company or organization with limited access to financial equity or development capacity, you may consider the joint venture development model. While a joint venture often involves a partnership between a nonprofit organization and a for-profit developer, partnerships between multiple nonprofits or for-profit entities are not uncommon. Cultivating relationships with potential partners can save you time and resources. When considering partnerships, look for developers who are experienced with similar properties (i.e., scale, location, single-site v. scattered-site).

Relationships with lenders can unlock resources that you may otherwise not have access to. It is important for you to understand who key lenders are in your market and what they are looking for. For example, some lenders may require at least 5 percent equity to underwrite an unsubsidized affordable development. It is also important to have current and polished information available on your organization’s finances so you can present your organization well.

The ability to acquire properties off-market can be advantageous. One strategy to do this is to build relationships with stakeholders who own the types of properties you are interested in. This may include small, local owners with small portfolios to institutional owners. Brokers and real estate agents may be helpful in building out your network with these stakeholders.

Additional Reading

 
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