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The process of owning and profiting from commercial real estate is more complicated than buying and selling. Of course, buying and selling always receive the most attention, because that’s where large fees and commissions are paid, but they are not the only means to increase investor value. In fact, as real estate markets, like equities markets, have become more efficient, creating above-market returns for investors on purchase and sale has become more perception than reality.

Henna views the lifecycle of commercial real estate ownership as a six-step process.

  1. Evaluation
  2. Acquisition
  3. Renovation
  4. Cultivation
  5. Disposition

Remarkably, most large fund managers are focused on acquisitions and dispositions, the two places where professional brokerage firms broadcast opportunities far and wide in search of the highest prices for their clients. From the investor’s perspective, this makes some sense for dispositions, but it makes little sense to acquire widely marketed transactions, since it precludes any value creation at acquisition. But with large capital commitments to invest and benchmark returns compounding, fund managers often seek this path of least resistance. Further, they don’t aggressively pursue the day-to-day opportunities to create value, instead placing properties into a holding pattern, hoping markets improve, and then disposing of them in response to timing incentives set forth in the operating agreements with their investors. Amazingly, some professional fund managers source almost all or their transactions through commercial brokerage houses for convenience, but then avoid the houses for dispositions, in order to avoid paying commissions.

This is completely backwards.


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