Closing a real estate deal is like going on a family trip to Disney
Being in the commercial real estate industry for 15+ years has taught me that the due diligence process for closing a commercial real estate deal is just like going on a family vacation to Disney World — just for 60 to 90 days.
As an Annual Passholder, I’m sure I’ve signed a document at some point that requires me legally to say that a Disney vacation is the happiest experience on earth. And don’t get me wrong — it has its moments.
But if we’re being honest parents (which I am sometimes), going through a Disney vacation is more like being in an overpriced bar where everyone is cramped, hot, and wants to throw a beer bottle at someone but won’t because throwing a $20 bottle Heineken obviously makes a lot less sense than drinking a $20 bottle of Heineken.
The similarities become even more obvious if you think a little bit about what’s involved in the closing process for a commercial real estate deal:.
- You have to go through a due-diligence checklist for a typical commercial real estate acquisition that, if it is anything like the ones I’ve used, is 10+ pages long and has 400 line items. Sounds like reading the list of rules for using FastPasses to avoid a 4 hour line. Check!
- You do your best to set up a renovation plan and scope, but many surprises come with it. Sounds like the budgeting process for Disney. Check!
- You usually have to take on a lot of debt you’ll be paying off for a long time to fund the transaction. Should be obvious. Check!
Suffice it to say that there is A LOT to cram into the typical 60–90 day process of going from Purchase and Sale Agreement to Closed Deal. It shouldn’t be a surprise, then, that most investors — particularly non-institutional ones — don’t want to add to the mayhem by adding “make my new building more sustainable” as item 401 to their due diligence checklist.
What exactly do I mean when I say “non-institutional investors”? Generally, the Class B and C segments of the major commercial real estate sectors are still largely the domain of such non-institutional investors, which are general family offices and/or syndicates of high net worth individuals owning real estate as part of a personal estate or portfolio.
In addition to making up a lot (if not the majority) of real estate ownership across many cities in the U.S. (especially in the Class B and C, non-multifamily sectors), non-institutional investors are also woefully behind their institutional peers when it comes to adopting sustainability practices into their acquisition and asset management plans.
There are many reasons why energy efficiency adoption isn’t as great within this group as it should be, but one of the most (if not the most) relevant one is that most efficiency marketing efforts target investors when they are in the middle of executing a business plan as opposed to when they are first developing the business plan.
Why does this matter? It matters because this 60 day diligence period is really no different from the 60 day window prior to your arrival at Disney when you are eligible to lock in your early/expedited access to the most popular rides! No way you are getting me to swap out my pre-scheduled ride on the Millennium Falcon that I booked 60 days in advance, even if doing so would give me both time to get on another ride and allow me to use my early park access privileges to get on the Falcon with uncertain (but likely minimum) wait.
And therein lies the challenge most energy efficiency programs face: even if they are “no brainers” economically, timing (or mistiming, in this case) is everything!
Don’t just take my word for it: a recent study by several professors at Carnegie Mellon asked 300+ owners of 500+ Class B and C office buildings in Pittsburgh what, if any, roadblocks prevented them from upgrading their buildings to be more energy efficient.
Notably, the three biggest impediments cited were: 1) uncertainty over projected savings; 2) an aversion to taking on additional debt for funding such improvements; and 3) a reluctance to pursue energy efficiency upgrades unless they explicitly led to improved tenant retention.
So is there a way that non-institutional investors in Class B/C assets can view the pursuit of energy efficiency as something that helps — instead of hinders — their diligence process? Well, there are at least three: