When a private equity firm assesses lease portfolios, their leading goal is to understand all associated risks, opportunities and the value. Because lease portfolios have the potential to genuinely impact the financial health of a company, thorough scrutiny is and should be expected. Here’s what private equity firms look for in lease portfolios during due diligence.
1. Lease Agreement Structure and Terms
When it comes to analyzing lease portfolios, private equity firms will put a strong emphasis on the quality and structure of those lease agreements. Lease durations, renewal options, escalation schedules and termination clauses will all be evaluated. Private equity firms will also look for leases that align with local and regional market standards and offer protection against unexpected issues such as subleasing, early termination and assignment rights.
2. A History of Tenants and Creditworthiness
Lease portfolios should demonstrate a strong history of reliability when it comes to tenants and creditworthiness. This is another critical element for private equity firms. Key considerations include financial stability and the business longevity of tenants who are occupying properties listed in your lease portfolio. High-quality, well-established tenants easily suggest a lesser risk when it comes to vacancies and potential losses on investment.
3. Lease Portfolio Diversification
Private equity firms embrace lease portfolios that represent a range of industry, location and property types. A diversified portfolio suggests that risks related to economic downturns or industry-specific changes might be mitigated or minimized when it comes to these property investments and their lease agreements.
4. Market Comparisons
In order to provide for the most accurate assessment of a lease portfolio’s value, private equity firms will often benchmark it against market standards and expectations. This will include comparing rental rates, lease lengths and even vacancy rates with similar properties throughout the region. This will also help those firms to more effectively understand how a lease portfolio might stack up against market trends.
5. Financial Performance and Stability
Knowing the previous and projected performance of a lease portfolio is critical when it comes to truly understanding its overall value now and for years to come. Private equity firms will review occupancy rates as well as lease expiration schedules and the history of collections and costs in order to understand the NOI (net operating income) and debt-service ratios. When a lease portfolio is able to demonstrate consistent and predictable cash flow, that will make those properties more attractive investment opportunities.
Private equity firms will also be looking at legal and compliance risks as well as capital expenses and maintenance obligations. It’s a thorough process and one that is designed to support and celebrate the true value of your lease portfolio.
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