M&A and the Art and Science of Real Estate Due Diligence

When assisting clients interested in acquiring another credit union or community bank, we organize the effort into two phases: First, “The Now” Phase followed by “The Next” Phase.

Last week, I attended Filene Research Institute’s latest webinar in their “So You Want to Talk About…” educational series. The topic this time was Mergers & Acquisitions.

For those not familiar with it, Filene is arguably the single best research resource for the credit union industry and Rubicon is proud to be a member and sponsor.

The session, nicely moderated by Paul Dionne, Filene’s Director of Research, included solid insights and tips from three CU industry veterans: Linda White, CEO, Upward Credit Union; Angela Hanson, President, Heartland Credit Union; and Fred Hagerman, Chief Operations Officer, Langley Federal Credit Union.

During the session, each of these seasoned executives shared valuable information on a broad range of M&A topics including business justifications, volume, P&L due diligence, regulatory challenges, member and staff communications and more.

Understandably, due to the time constraint, the panel was not able to go deep on every M&A issue. Among them, the due diligence steps required to effectively assess the value and liabilities of real estate portfolios being either sold or acquired.

To that end, I’d like to offer some tips on the subject from the point of view of the prospective buyer.

What’s Immediate Compared to What’s Envisioned

When assisting clients interested in acquiring another credit union or community bank, we organize the effort into two phases: First, “The Now” Phase followed by “The Next” Phase.

In both phases, we leverage the power of Rubicon Reveal — our proprietary market research database – to query, acquire, aggregate, verify and assess key information about any U.S. market as it exists today along with where it is trending for the future. Here’s how it works …

Phase One: The Now

In this first phase: aka “The Now” – (think due diligence with a singular focus) — we are highly pragmatic and analytical.

We begin by acquiring all the information available about the prospect party’s real estate portfolio including its HQ, regional offices, branches, call centers and/or any other properties – leased or owned – that may be included in the transaction.

With that information in hand, we then determine whether each holding is an asset, a liability, for how long and to what extent. Using the power of Rubicon Reveal (along with our own eyes and shoe leather), we create and deliver to our client a current Evaluation Report of the other party’s portfolio. In this report we make recommendations for each property based on the asset itself and the market in which it is located. Doing this is vital in order to fairly and accurately price the overall acquisition while eliminating costly surprises post-close.

Phase Two: The Next

When it comes to the long-term future, we believe that Phase Two: (aka “The Next) is equally – if not more – important than the initial phase. Here’s why …

With all of our clients, we begin with this question: “What is your ideal membership of the future?” And we ask this again when a client is considering an acquisition.

Based of their answer, we then re-analyze the other party’s real estate portfolio through “The Next” lens. One that helps us assess what portions of the new portfolio should be held, upgraded, re-negotiated or sold.

Again, we turn to the power of Rubicon Reveal to help us analyze key demographic and growth trends within the associated market to determine what to do, when and how regarding each asset. For example:

  • Which HQ facility is best for their future needs and whether to sell or sublease the other?
  • Will all the newly acquired branches remain open, be re-branded, up-dated, sub-leased or even closed, if necessary?
  • Should other owned properties be held, upgraded, developed or liquidated?

Fully Informed = Fair

Assessing the prospective portfolio in this manner achieves two key goals:

1. It reveals potential issues and establishes a fair “at-this-time” valuation.
2. It establishes a road map for the future – which is primarily why the acquisition is being pursued in the first place.

The credit union industry was built around the foundations of fairness and community for its members. How CU’s negotiate and transact with one another in a merger or acquisition is certainly in concert with that foundation and ethos.

PS: I recommend signing up for Filene’s next webinar on October 6 entitled “So you wanna talk about…Future of Branches!” Register at filene.org/events.

Corey A. Waite is a leading commercial real estate advisor to the financial services industry. As Founder and CEO of Rubicon Concierge Real Estate Services, Corey works directly with senior executives coast-to-coast to deliver strategic plans and transactional services focused on optimizing the needs of employees, clients and members.

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