Property Management Case Study 7

Needs

It was a partnership firm with multiple partners, but due to irreconcilable differences, the partners decided to split the firm. Our clients were one set of managing partners who needed a rationale comparison of different possible post dissolution scenarios. Another need was a careful vetting and selection of the properties in the partnership portfolio so as to secure the optimum post-split portfolio of properties for our client.

Challenges

• Equity Separation: More than 100 properties with multiple equity ratios among different partners substantially increased the complexity of assignment. We had to analyze and segregate properties according to maximum ownership ratio, so that the least amount was paid to other partners. Also, we had to try and select portfolio properties in same location within entities to get benefit of profitable location for our client
• Performance Analysis of Properties: Client requires allocation of properties according to their financial benefits and debt status. We have to list up properties that never generated profit for the firm, so that client could advocate their sell off. An analytical performance report card had to be prepared for every property to assist the law firm hired by our client. The analysis also was challenging as the partnership had about 30 years of data. We had to generate ratio analysis, net savings and debt analysis of all the properties
• Different Separation Plan: We had to analyze different options under the separation plan. Also we have to structure duration of plan, execution of plan and cost of execution for each scenario of the separation plan. In addition, the pros and cons of each plan had to be detailed. These activities required an in-depth knowledge of ratio analysis, financial modeling and residential real estate

Solution

• Properties Allocation as per Equity Share: We had suggested client to start with “Asset Allocation” based on the current market value of the assets considering debt on asset and allocating depreciation on every property. We had also calculated ROE of the asset by comparing last 7 years financial data to calculate whether takeover of every particular asset will be beneficial for the client. We had created different entities of the properties as per location, so that we can bundle up properties which client should occupy in the separation plan. We have bundle up properties on the basis of client’s share of higher equities, market scenario and condition of properties, so that client had to repay lesser amount to other partner
• Structure of Separation Plan: Our financial analyst expert team used different ratios such as ROE, IRR, and NPV to compare multiple separation scenarios. These comparisons led to finalization of two possible separation plans:
  1. “Fire Sale” of assets
  2. “Tenants In Common” 1031 exchange
• Our analysis yielded the following strategy: Choosing a Fire Sale option mainly for the properties which were generating negative cash flow from past few years consistently and also had a high equity percentage from our client. The Fire Sale option helped our client in generating funds required for takeover of other beneficial properties at the time of final settlement. While analyzing the Fire Sale option, we had to consider factors such as high equity percentage of our client, expenses to be incurred in sale of properties, capital gain taxes on equity after sale of assets, and the likelihood of a future turnaround for such properties. In tandem, the “Tenant In Common 1031 Exchange” for the properties which were generating revenues, so that no one had to suffer loss and could minimize capital gain tax. These properties were generating good returns on equity and favorable capital appreciation prospects in the short term. A detailed excel model was created to assess the property level, entity level and portfolio level impact of these strategies. The excel model was complete “soft-coded” to enable sensitive analysis, multiple scenario analysis and other forms of financial analysis to be executed easily