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The real estate decision process.

Asset management is a hot topic among real estate professionals, discussed by many, but understood by relatively few. Because asset management is not a finite, stand-alone function and because asset managers' duties overlap, build upon, and complement those of other real estate professionals, questions persist regarding this growing area:

Why is there suddenly so much interest in asset management.? How does the asset manager differ from the property manager or the portfolio manager? How does he or she fit into the real estate investment scenario? These are not easily answered questions.

Changing real estate ownership

As the nature of real estate ownership has changed over the past 30 years, from predominantly individual to institutional, asset management has grown in importance. The shift in ownership orientation has, in turn, altered the way property owners acquire, sell, finance, and manage their properties.

While individual owners usually managed their assets directly, or perhaps hired other individuals - as opposed to organizations - to do so, institutional owners are by their nature distanced from the properties. This has created the need for communication channels between on-site management and institutional owners.

Evolution of the asset-manager role

As property managers became separate entities from property owners, and as managers' duties became more general, the need arose for an intermediary professional - one who would serve as the owner's coordinator of activities beyond property management, including financing, construction, and disposition. Thus the asset manager was born.

The asset manager is the key link between institutional owners and on-site management. He or she works with the numbers-oriented portfolio manager as well as the operations-oriented property manager, serving as an intermediary between the two.

The portfolio manager establishes investment strategies for the institutional owner and uses the asset manager as a conduit through which to communicate with the hands-on property manager, who is ultimately responsible for achieving the investment goals.

The asset manager also serves as the channel of communication from the property manager to the portfolio manager, filtering feedback in order to prevent the portfolio manager from receiving excessive and/or faulty information about investment performance.

Of course, in reality many additional consultants - including pension fund advisors, appraisers, bankers, attorneys, engineers, property vendors/contractors, and leasing agents - participate in the management of real estate investments. In addition, some institutional owners choose to limit the participants in real estate management while others work with onsite property managers as well. However, the decision-making chain described in the remainder of this article is a fairly typical one.

Real estate decision-making

The typical decision-making scenario for an institution investing in real estate involves many steps - from establishing risk profiles to task coordination - all interrelated. While there are as many investment management scenarios as there are investors, this model presents the most likely scenario, with the circles clearly showing the overlap of duties.

It should be remembered that every ownership of real estate is different, and it is the investor who sets the stage and designates the players. In some instances, the investor, the portfolio manager, and the asset manager, for example, are one and the same, and all their duties would be absorbed by that player. Thus, the circles are collapsible.

The decision-making process begins with the investor, who establishes long-term investment criteria based on actuarial projections and risk profiles created from information provided by actuaries and consultants.

The next step involves the investor and the portfolio manager At this level, investment objectives are established for the entire investment pool. These decisions are made by the institution's officers in conjunction with its consultants and portfolio managers.

Based on the investment criteria established together with the investor, the portfolio manager decides what percentage of assets will be allocated to real estate. For example, many domestic pension funds claim a target of 6 percent to 10 percent of assets allocated to real estate, but in fact have only 3.5 percent to 4 percent in property investments.

Next, a strategy for achieving the real estate investment goals is devised. This is developed by portfolio manager and the asset manager who also determine who will be accountable for these decisions and at what level of control.

The real estate pool can be divided between equity, conventional debt, and hybrid equity investment, and specific criteria for these allocations can be established with the overall objectives in mind. Decisions must be made about property types and sizes, leasing risks, geographic locations, and development risks.

When an institution acts as a lender, providing real estate funding by way of loan, the asset manager's role is much more passive than it would be if the institution were making an equity investment. Lender liability constraints limit the rights of a lender to participate in the management of the real estate because the asset is collateral, not owned.

The asset manager's job in this scenario includes understanding the local laws governing these rights as well as the borrower's obligations and lender's rights within the context of these laws. However, it is as important to the lender as to the equity investors that the property perform well, and the asset manager, as lender, still must rely on the executive property manager and property manager to provide feedback regarding the property's performance.

The asset manager, in turn, works with the executive property manager and the property manager in targeting specific properties for investment, based on the criteria previously established by the portfolio manager and the investor. They also conduct a thorough due diligence and structure deals, ensuring the investment criteria are met.

Due diligence and acquisition planning can, of course, be addressed at a different level, often only by the asset manager or the investor. However, this level - where the asset manager meets the executive property manager and the property manager - is the optimal one for these tasks. The executive property manager and property manager will actually be implementing the plans laid out by their superiors, and they have the on-site expertise and perspective necessary for devising an effective plan.

The specific process for due diligence and acquisition planning must be detailed and must include market, lease, and financial analyses, encompassing the development of realistic pro formas and operation audits, and physical and environmental inspections. It should also include legal research of title fitness and an analysis of land use. Advisors again lead this process, with varying participation by the property managers.

The executive property manager and a local property manager work together to provide local expertise and hands-on knowledge of property operations in the market. Ideally, a strategic business plan and market positioning for the property should be finalized before completion of the deal. The strategic business plan includes the selection of a management firm.

The property manager and executive property manager also work together on preparing the operating plan and budget for the property. These must agree with the owner's objectives and desired market position for the property. However, an accurate budget can be prepared only after the operating plan is defined. The property manager should prepare the budget within the guidelines set by the executive property manager based on input from property staff.

The property staff, in turn, can implement decisions within the framework of policies and procedures established by the executive property manager. By working with the on-site staff, the property manager can efficiently coordinate tasks at the property, using job descriptions, detailed schedules, and information culled from regular staff meetings.

Perhaps the most important requirement for the success of the property manager is constant, effective communication with the asset manager, executive property manager, staff, tenants, brokers, vendors, and peers.

The accompanying graphic illustrates the interaction among the players in real estate ownership/investment/management. Just as information flows from the investor to the on-site management staff, feedback also flows from the on-site staff through the executive property manager and property manager to the asset manager, the portfolio manager, and ultimately, the investor.

The communication channels vary, depending on the ownership structure and management mechanism, with some scenarios including more players with more specialized roles, and others including fewer players serving more, and more general, functions.

The players' roles

The property staff is responsible for reporting the daily activities of the property. This group compiles reports and keeps track of completed work orders, tenant call reports, purchase orders, and invoices. The staff also is responsible for handling leasing proposals and call reports. information flows from the on-site staff to the property manager and executive property manager.

At this point, an accounting staff usually summarizes the data, creating operating statements, accounts payable reports, accounts receivable reports, and leasing reports. This group also prepares qualitative and quantitative status reports on marketing and leasing activities at the property and generates action plans to correct variances or to collect delinquent rents.

The feedback loop continues to the asset manager, who consolidates reports of the real estate portfolio. The asset manager's performance is evaluated by the portfolio manager, who integrates the data from various real estate asset managers into an overall portfolio performance statement. This statement, along with reports on the performance of non-real estate assets, is provided to the investor.

The investor reviews the information he or she has received via the feedback process, then sends directions back through the pipeline, thus maintaining the information flow forward - and backward - through the players.


The asset manager, whether for an equity real estate investor or a lender that holds a real estate mortgage as collateral, serves as a translator in the investment process. The asset manager must properly relay the financial goals of the investor to local management and property conditions from site manager to portfolio manager.

Institutional investors generally think in strictly financial terms and may have limited understanding of the battles fought in the trenches by the property management staff. The asset manager must receive feedback from the property level, including evaluations of the possible impacts of the owner's and investors' financial goals.

In this way, the asset manager will understand the day-to-day factors influencing the real estate and will get a realistic sense of the sub-market conditions and the overall real estate environment. Thus equipped, he or she will also be able to realistically assess the property's income-producing potential.

In short, the asset manager must oversee detailed plans to meet broad goals, summarize detailed reports into succinct analyses, and communicate the means by which returns can be optimized.

William Norwell, CPM! is chief operating officer and director of property management for Corporate Realty Advisors, Inc. of Des Plaines, Illinois. Formerly, he was an executive vice president with Hawthorn Realty Group.
COPYRIGHT 1991 National Association of Realtors
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Asset Management
Author:Norwell, William
Publication:Journal of Property Management
Date:Mar 1, 1991
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