In the real estate development business, it’s easy to fall in love with a site and your own vision of what you can make of it. Unfortunately, emotion isn’t the best investment advisor, often leading to aggressive assumptions and bad outcomes.
One way to keep a check on one’s emotions when making real estate decisions is to take a “de-risking” approach to the task. My firm, The NRP Group, has developed a robust underwriting and approval process over the past 20 years to ensure significant value creation in each multifamily property we develop and build. The tactic may yield fewer deals, but it affords us a consistent track record of delivering superior returns for our investors. We believe the approach could help other developers, too.
Personality-Free Zone
The recipe is simple but difficult to execute uniformly and consistently. At its core is the investment committee, which requires unanimous sign-off on each project by all of its members. The real estate industry is famous for its strong personalities. Our investment committee’s approach is to remove the strong-personality factor and emotion from the process.
Like some other development firms, we’re vertically integrated. We handle development, construction, and property management in-house, which enables us to control the whole life cycle of a project. Vertical integration also means we have the in-house knowledge—represented by a deep bench of talent on our investment committee—necessary to make informed calls in each facet of project analysis.
Before a prospective property clears our investment committee, our head of construction has determined the construction costs, while his counterparts on the property management, development, and finance sides have all reviewed their own numbers and areas of responsibility. The investment committee also includes the heads of marketing and asset management as well as our general counsel.
Accountability Is Key
Each company division is held accountable for its part in the production process, so unanimous project approval is required. If any team is uncomfortable with the assumptions presented, it has veto power to stop the process until that team is satisfied with a resolution. That way, we answer every question up front—about construction costs, design parameters, the delivery schedule, rents, expenses, lease-up velocity, debt and equity assumptions, exit capitalization rate—and only proceed if everyone agrees.
The push-and-pull continues, sometimes with many additional investment committee meetings, before a project is terminated or advanced. Finally, each investment committee–approved property is presented before our executive committee, which includes our chief executive, chief financial officer, and board of directors, for final approval.
A crucial component of our process is that only after final approval by our executive committee do we seek equity and debt financing. We never let investors or lenders do the vetting for us. We never let the market decide whether we should proceed with a property. We never push a deal through simply because the capital is there. The ability to finance a deal doesn’t make a bad deal into a good one.
Once we have full approval, however, we know we have a project that will be a success, irrespective of how we capitalize it. This means we’re comfortable investing our own capital, both in predevelopment but also as a substantial portion of the permanent equity. We know our financial partners appreciate that, when they review an NRP opportunity, it’s been underwritten and approved by all of our functional groups, and that we’ll be significantly invested and financially aligned alongside them.
An intense, up-front vetting process is expensive and time-consuming and results in a lot of deals that don’t survive. Along the way, we may have missed a few opportunities, and, admittedly, the tactic has slowed us down. Our patient approach, however, has consistently created phenomenal properties of which we at NRP, our lenders, our investment partners, and our residents can be proud.
