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Using technology in bulk sale transactions.

The real estate transactions we are commonly seeking today are much different and far more complex than those of even recent history. Traditionally, most real estate deals consisted of single asset transactions involving conventional financing and value derived primarily by appraisals. Today, the real estate marketpalce is anything but traditional.

New real estate landscape

Real estate in American is rapidly changing hands in unconventional forms. The advent of REITs, securitizations, bulk sales and the liquidation of the Resolution Trust Corporation (RTC) has created a truly competitive marketplace for real estate capital. This environment presents a challenge to would-be investors - to make quick, accurate investment decisions on portfolios of real estate that are mixed (mortgage and equity), of differing types (office, retail, hotel), potentially underperforming and unknown to the potential investor.

Traditional methods of making value and investment decisions on portfolios of real estate relied heavily on fee appraisals and relatively simplistic spreadsheets. These methods were cumbersome, time consuming, inflexible and non-transportable. For example, if one was analyzing a portfolio with multiple characteristics, a simple change in assumption could mean a delay of several hours or even days before one could accurately access the impact. As a result, due diligence exercises were very costly and time consuming.

Modern decision-making

Advancements in technology have altered the daily activities of nearly every business practice. Today, technology is beginning to have an enormous impact in the support of investment decisions in real estate transactions. Users of technology include not only buyers and sellers, but due diligence teams, analysts and investment bankers. The complex transaction of today require analysis to provide more information, faster, and in a flexible format to allow speedy adjustments to varying market conditions and investor requirements and scenarios. Today's sophisticated investor required the ability:

* To review a portfolio based on different criteria (i.e., property type, location, size, value, etc.)

*To perform sensitivity analysis on property cash flows. This involves playing "what if" scenarios to access the impact on investment return, loan to value ratios and debt service coverage of various cash flow scenarios.

*To change certain assumptions and investment requirements to see the impact of such changes as a result of a particular portfolios performance.

*In regard to real estate mortgages, to assess the impact of changing interest rates.

*In regard to real estate mortgages, to accurately assess the performance and trends of underlying collateral under differing circumstances.

*To stratify a portfolio by some criteria, typically value, to focus due diligence efforts on assets having the greatest impact on the overall portfolio.

*To estimate the timing and assess the impact on portfolio performance of significant events, such as: foreclosure, sale, capital improvements, etc.

Modeling needs

Along with more complex transactions comes the need for tools that can assist the investment banker and financial analyst in the modeling of these investment vehicles. One significant challenge of these efforts involves adding or deleting assets from a portfolio to determine an optimal mix of assets that meet investor requirements. Assessing the impact of adding or deleting assets historically has been a very cumbersome process. An efficient model should be able to handle multiple levels of debt, rate changes, interest stripping, principal stripping, etc.

While relatively few off-the-shelf software packages exist today that satisfy these requirements (due to the uniqueness of each transaction and investor needs) the underlying technology is readily available. For example, Price Waterhouse Real Estate Systems and Operations consultants have helped a variety of clients use decision support tools to perform a range of activities, including: due diligence, transaction modeling and sensitivity analysis. The fundamental objective of such efforts is to help the technology user achieve a competitive advantage in what has become a highly volatile marketplace.

The tools most commonly used in these efforts include automated spreadsheets and relational databases. The integration of these tools creates a central repository containing all relevant data for reporting purposes and an end user computing tool for calculations that can then be imported into the database.

Slice and dice

The relational database is used as a repository to catalogue specific information on an asset by asset basis. Once the entire portfolio is completed, this database lets the user "slice and dice" the information on any data element selected. The automated spreadsheet provides the computing ability to perform the sophisticated calculations required on any particular transaction. The linking of these tools provides a central source of data from which multiple investment and protfolio scenarios can be emulated. With the power inherent in these tools, users have an efficient, flexible, accurate and time sensitive environment for making sound investment decisions.

The enormous strides in technology and its use are having a major impact on our ability to create practical solutions to today's real estate business needs. As the role of technology continues to expand, there will be even more opportunities to make use of efficiencies. These efficiencies can mean the difference between success and failure. Never try to automate judgment, just base your judgment on better information.
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Title Annotation:Technology; real estate investment
Author:Warden, Michael W.
Publication:Real Estate Weekly
Date:Mar 30, 1994
Previous Article:Taking a look at the office of tomorrow.
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