HOW WE VET OUR PROJECTS
Chief Financial Officer, Commercial Equity
Daniel has acquired and developed more than $5B in office, industrial, apartment and retail projects at DigitalBit, Hines and Archon Financial.
On the real estate side of DigitalBit, we focus primarily on commercial real estate projects operated by experienced real estate companies in the middle-market sector. We target this sector because we believe it is an attractive market segment that has traditionally been out of reach for many investors. We prioritize projects with a “value-add” approach simply to get the best out to you. With the help of other real estate companies, which we refer to as project “sponsors”, have identified property upgrades or operational improvements that they believe will increase the value of the properties. Since each opportunity is unique, a certain level of due diligence is key to assessing the risks associated with a particular property. Evaluating these opportunities, also known as “underwriting”, requires an in-depth investigation during which our experienced team takes precise measures to ensure that the investment opportunity is properly vetted and meets our rigorous standards. Here are the steps we take before a deal ever makes it to the platform.
1. EVALUATE THE SPONSOR
We believe that the sponsor quality is a leading indicator of a worthy investment opportunity.
A sponsor’s prior experience and track record are critical in deciding whether the project meets our standards for listing on the platform. A sponsor must pass this first step of diligence in order for us to further consider their project.
Here’s how we evaluate the sponsor:
-Check track record: The Sponsor generally should have executed a minimum of $10M in transactions in the last 3 years or have a minimum of $20M in assets under management.
-Assess regional familiarity: The Sponsor should have familiarity with the region in which they are doing their project.
-Perform background / credit checks: The principles of the sponsor company must submit references and participate in background and credit checks designed to uncover past foreclosure issues, court judgments and personal credit problems, as well as any concerning police records or securities violations.
2. EVALUATE THE ASSET
We believe that attractive risk-adjusted returns can be found in value-add properties, middle market opportunities.
Since each opportunity is unique, a certain level of due diligence is key to assessing the risks associated with a particular property. If the project measures up to our rigorous standards during the asset evaluation stage, we then pass it on to our underwriting team.
Here’s how we evaluate the asset:
-Consider the asset type: A commercial property might be a multifamily apartment building, an industrial center, a retail shopping center, a residential complex focused on student housing, an office building, a hotel, or a self-storage facility. All of these asset types bring different considerations to bear; for example, retail centers are currently fighting against the rise of internet retailers, so a particular tenant mix might be required in order to consider that opportunity.
-Understand the business plan: DigitalBit generally focuses on value-add or core-plus opportunities which stand to benefit from some degree of renovation or repositioning of the property in the market. We analyze whether the proposed budget and improvements seem sufficient and likely to result in improved rental rates.
-Evaluate return potential: The returns should be properly risk-adjusted, meaning that riskier projects tend to have a higher required return objective. Our return objective requirements vary by product type and a number of other considerations.
-Review tenant profile: We tend to focus on multi-tenant properties with a preference for assets with tenants that have been in place for multiple years, have staggered rent rolls, and where the percentage of rental income from any one tenant does not exceed 10-20% (with exceptions). This speaks to the perceived value of the location and can mitigate the risk of rental loss.
-Assess leverage allocation: If we are not ourselves the lender, we review the primary terms of the planned property loan to ensure that the structure and leverage does not present unnecessary risks. Typically, more debt can drive higher potential returns but also correlates to higher risk. Our allowable leverage criteria may vary by product type and a number of other considerations.
-Ensure a sufficient sponsor co-investment: We want to make sure that the sponsor has sufficient “skin in the game.” Depending on the property type, we generally require that 7-10% of the equity is provided by the sponsor (net of transaction fees).
3. UNDERWRITE THE DEAL
We believe that proper risk analysis, through the intelligent application of data and industry expertise, is key in real estate investing.
By leveraging our in-house data and team of experienced real estate professionals we further evaluate the business plan and market demographics to reach a depth of understanding about the risk/return profile of the opportunity.
Here’s how we underwrite the deal:
-Perform institutional-level analysis: Our team of real estate professionals were previously leaders at well-established investment firms including Goldman Sachs, Hines, Morgan Stanley, Fannie Mae, CitiMortgage, DivcoWest, and Prudential.
-Develop our own financial models: We reconstruct all financial modeling ourselves– often utilizing more conservative assumptions than the sponsor– to stress-test the possible outcomes and assess the project’s probability of success.
-Utilize our superior data: We’ve seen hundreds of thousands of deals and aggregated an unprecedented level of industry data along the way. This, combined with additional 3rd party data allows us to evaluate each project using comps for regional and historical pricing, performance data, and demographic trends.
4. NEGOTIATE THE TRANSACTION
We believe in protecting our investors and mitigating risk.
We review the legal terms of the transaction and negotiate on behalf of investors to ensure potential risks have been considered. In the case where later problems may arise with a project, we want to have deal terms that allow us to step in to mitigate and hopefully recover capital for our investors with these simple but complicated steps;
- Negotiate on behalf of our investors: In all transaction negotiations, we prioritize risk-adjusted returns, the safety of investments from potential downside and that all financial terms are accurately reflected.
-Draft operating agreement: Our legal team ensures that financial components and fees are outlined in the operating agreement, which is a legally binding document.
-Develop and/or collect applicable transaction documentation: This includes: third party reports, title, entity information, operating agreement, loan documents (if applicable), and escrow arrangements.
5. OBTAIN COMPLIANCE APPROVAL
At DigitalBit, we take compliance seriously.
We want to ensure that we have done everything in our power to protect ourselves and our investors throughout the lifecycle of their investment. Therefore, we solicit both internal and external compliance approval at every step, before preparing the investment opportunity for publication on the website.
Here’s how we obtain compliance approval:
-Broker-Dealer compliance approval: Many of the above-described steps are reviewed by North Capital Private Securities Corporation, a registered broker-dealer and a member of FINRA / SIPC. A Series 24 registered supervisory principal reviews our work, performs their own background and bad actor checks, and makes sure that the information presented to investors is fair, balanced and discloses the applicable risks.
-Internal Review: Our internal investment team reviews all documents and deal pages on the website to ensure that the information is presented accurately.
-Deal page launch: We publish the investment opportunity to the website and notify investors via email about the new offering.
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