When Underwriting Assumptions Meet On-the-Ground Challenges in Property Performance

Introduction to Underwriting Challenges in Real Estate

Drew: Welcome back to the Peak Property Performance Podcast. I am your co-host, Drew Hall, and before we get to today's panel and guest, let's talk about the theme of today. It's going to be underwriting versus reality, where deals break after the close. And before we introduce our guests and bring on Bill here, I just want to remind our listeners, as always, to like, subscribe, share the podcast. This is how we're spreading the word on the PPP movement and changing an industry. So also, if you think you'd provide value as a guest here, we welcome commercial real estate thought leaders from all stages of ownership and operation, even tenancy. Please reach out to us via LinkedIn or our website, PeakPropertyPerformance.com. There's all kinds of ways to get connected there. So look forward to seeing you there.

Drew: So without further ado, Bill Douglas, welcome.

Bill: Always a pleasure, Drew. And so our guest today is Greg Lozenak with GJL Real Estate Advisors. And Greg operates at the intersection of capital, development, and execution, working across hospitality and multifamily and complex real estate projects where things don't always go according to plan. So I'm sure we'll have some fun conversations around that. What makes Greg interesting for this audience is he's not just allocating capital, he's living in the friction between underwriting, operations, and reality. He sees where deals break, where assumptions fail, and where operators either regain control or lose it entirely. So today's conversation is about what actually happens after the deal gets done, where visibility, execution, and discipline determine outcomes. So Greg, happy to have you on the show. Welcome.

Greg Lozenak: Yeah, thanks for having me. Welcome. Happy to be here. Yeah. Yeah. Appreciate you taking the time.

Understanding the Disconnect in Rent and CapEx

Bill: Greg, let's start, Ed, kind of peeling back the gap between underwriting and operations reality. Where do you most consistently see underwriting assumptions break once that deal does move into operations?

Greg Lozenak: Yeah. I think a good starting point would be to kind of take a step back and talk about underwriting in today's environment versus, say, 2010 or up and through about 2022. Real estate used to be a financial asset, right? You would underwrite a deal, you'd buy it at a great price, get good leverage, and underwrite some cap rate compression, or maybe not underwrite the cap rate compression, but expect it. And so you could buy a property, run it okay or average, and still get a great exit because of the cap rate environment. Today, that cap rate environment's kind of gone away, that cap rate compression. And so real estate has moved from a financial asset to an operational asset in that you really have to maximize the performance of a property from an operations standpoint to really get to your targeted exit, whether it's returns or multiples or whatever your target is. You really have to be able to operate an asset efficiently to get the growth that you need to exit.

Greg Lozenak: I think the biggest disconnect that I've seen over the years in underwriting, it starts with the rents. And what happens in most underwriting models is that when they apply a growth rate for a year, that growth rate takes place day one of month one of year one. And that works well if you've got a commercial asset where the least terms are five, six, seven years and they're spread out, but it doesn't necessarily work when you've got a multifamily property with leases expiring across 12 months. If you're front-loading all that growth, if you underwrite a 3% growth, you really have to get closer to 6% throughout the year to account for the lease churn. Some models incorporate that, some don't, but if they don't, you're starting out behind the curve already.

Greg Lozenak: From there, I think where I see a lot of disconnect is from the CapEx side, especially when you're buying value-add properties and you're trying to renovate units to get rent growth. That may or may not work in today's environment, but that was a big strategy up until about 2022 and 2023 when the markets changed. And whether you're doing exterior or interior renovations, usually in a value-add, you're doing both and you have to structure that in that in order to get the right demographic from a resident standpoint in terms of how much money they make, how much income they have that they could push towards housing. But you have to have an asset that's going to attract that demographic, right? So you really have to start your capital expenditures program from the exterior from the start. And then once you start getting that right demographic in, or you've got a product that will attract that demographic, then you can start your interior value-add program. So you can't necessarily expect that to start day one of month one, it might be month three before you get to that. And then you have to gradually increase that in order to get to get the right rent that you're trying to target. So those are kind of where I see some of the disconnect in underwriting.

Bill: Yeah. Yeah. So, I mean, there's a lot there just in terms of rent rolls and rent rates. When you think about deals that do underperform, do you see that as being generally based on bad assumptions or just managing it ineffectively on the ground once it's operational? Or do you see some common causes for underperforming assets?

Greg Lozenak: I think it's a combination, right? There's aggressive underwriting and then there's underperformance, if you will, at the site level. Go back to, again, value-added interior renovations and the growth that you're trying to get on that. If you front load that too much, you're not going to have the product that will attract the demographic that you need to in order to get those rents. So that's an aggressive under assumption or some underwriting assumption. From an operating standpoint, you have to be careful about your redevelopment pipeline of the unit interiors, right? Again, you've got to get that exterior amenities, that exterior marketing window correct to attract the right demographic, but you can't just throw every unit into the renovation pipeline. It'll be fewer. Just because a unit becomes vacant doesn't mean it necessarily needs to go in the renovation pipeline. You have to put in fewer units initially so that you can get your workflow or your work rhythm as it relates to the unit interior renovations and have them come off the back end of the pipeline. Otherwise, if you just keep slamming every vacant unit, anytime a unit becomes vacant, you push it into the renovation pipeline, you're going to end up with a backlog of units in that pipeline because nothing's coming out the other end. And you're going to miss your occupancy targets, you're going to miss your rent targets, it's just going to compound itself over the course of year one.

Key Performance Indicators vs. Results in Property Management

Drew: We see, maybe we just hear about it, Greg, because of this audience, but we see owners managing off reports and not real visibility. So there's this difference between visibility and a narrative. So how do you separate what's actually happening at a property versus what's being reported up the chain? Like I manage a property, I send a report in, but I've also managed the report. I'm not going to say manipulate, I'm just managing it because maybe the KPIs are the only thing I'm reporting and not everything. That's the difference between reports and visibility. Like dashboards aren't going to tell you things that maybe genuine data or AI could see. So how do you separate what's actually happening?

Greg Lozenak: Yeah, I mean, I think you have to differentiate between what are the KPI versus the KPR, key performance result. You know, occupancy, some people might think KPI, but in my mind, it's a KPR, right? There's certain things that happen along that line in order to get your occupancy, right? How many leases do you have coming in? How many of those are converted to tours and from tours to leases? What's your renewal percentage, right? That all kind of leads into occupancy. So some respects you can call occupancy KPI, but in my opinion, it's more of a KPR, right? So I guess that's a nice misnomer. You think a KPR is actually lagging, looking backwards, a KPI, in my opinion, should be looking forward. What is coming down the pipe that's going to impact my business versus how did I perform? Like a 10Q public company report is a KPR in your opinion, right?

Bill: Yes. Yeah. So again, you look at occupancy, right? What we just talked about with, for example, a value add property where you've got a renovation pipeline. Again, if those units aren't coming out of that pipeline, your occupancy might look good today, but 30 days from now, it's going to tank because you just don't have the available units to lease, right? Now I think the other aspect of that is just communication and understanding throughout an organization what you're trying to achieve with a specific asset. I worked at a company where we bought a student housing property. We bought it. It was probably 85, 90% occupied, but the rent collections were like 60%. So it might as well have just been 60% occupied. And it became an issue when the occupancy slipped to say 75%, but then there was a discussion with throughout the organization, our occupancy may be lower, but we're actually collecting more revenue. We pushed out residents, students that weren't paying rent and why we didn't necessarily bring in as many, we brought in more that were actually paying on it, right? So it's the communication, it's the understanding of what the objectives of the asset is. And then it's a discussion of how we get there.

Drew: So what I hear you saying, correct me if I'm wrong, is you shifted the indicator KPI or KPR, whichever direction you want to look from occupancy to gross revenue, and that was more impactful. I mean, occupancy impacts it of course, but your key indicator was gross revenue.

Greg Lozenak: Yeah. Rent collections, right? How much rent am I collecting? Rent collections. Yeah. Yeah. Rent roll. Yeah. I think in generic business terms, that's gross revenue. That's fair. Yeah. Yeah. So if you're 60% occupied, but you're only collecting 60% of the rent, well, what does that percentage of residents that are not paying rent, what are they doing to the property? How are they impacting the reputation? How are they impacting the physical appearance of the asset? And you may be better off at a lower occupancy, but with higher rent collection.

Bill: Okay. Yeah. Yeah. Great example. If they're not paying rent, they're probably not in there doing tenant improvements either. No.

Drew: All right. Probably not. Yes. Or a Bitcoin mining operation. What we've told you, we'll start going through the roof, right? Thanks for sharing that example. I was about to ask you for one and you beat me to it. So that's perfect.

Early Execution Risks in Complex Developments

Bill: So Greg, when you're involved in more complex developments or repositioning, how early does that execution risk, I don't know if I'd say typically show up, but how early can it show up? You know, like you mentioned, non-paying in student housing, obviously that's a potential risk for sure, but how early on can this thing rear its ugly head, people process, information breakdown? What do you see?

Greg Lozenak: I mean, it can happen as early as the first 30 days, right? Again, if your assumptions are really aggressive, especially in today's environment, that could show itself in the first 30 days in terms of not being able to get the rent growth, especially on a value-added property where you are incorporating renovation of unit interiors, right? You know, as a company, you have to understand again, what you're trying to achieve with an asset, right? And I think what I've seen work successfully before is having that conversation as part of the due diligence, or even before the due diligence starts, having a conversation with the operations team, right? Here's what we're underwriting. Here's what we think we need to see in order to get there through the course of due diligence, be looking for these things, these indicators that we could potentially be off, and then you have to have an organization that's willing to hear bad news, right? Or hear news that might contradict what you're underwriting.

Drew: Does that mean then you kill the deal? No, maybe you adjust your underwriting and it still works. Or maybe you find something throughout the course of due diligence that the seller didn't disclose that could potentially significantly impact the property. Well, then you got to go back to the seller and say, Hey, you know, you didn't disclose this, this impacts our underwriting, you may need to retrade or you may need to walk away from it. That's not something a lot of sellers want to hear. I can't think of a single seller who would want to hear that, but for me, it starts right at the beginning of due diligence and even before due diligence, before you put that final offer in, you've got to understand what assumptions you're trying to achieve and make sure you have that conversation with the operations team about what needs to happen in order to do that.

Bill: Yeah, it's interesting. I mean, I think it might be the previous episode that we recorded with our guest talking about the power of that data, the meaningfulness of that data, but sometimes ignoring it because of what it might lead to, just kind of looking away from a new reality, Oh, here's some data that points to something real. Ah, that's almost like an inconvenient truth to borrow a phrase. Then it's surprising. It's surprising. I mean, I say it's surprising from where I sit that would ever happen because this seems like knowledge would be power to your point.

Drew: I think that they said, Drew, that that guest, I'm forgetting his name, but he said that if I knew it, then it becomes a liability. So I don't want to know it. And I was like, wow, I couldn't wrap my head around that. I don't subscribe to that philosophy. I'd rather know it, you know, I'd rather know it. On either side of the conversation, I'd rather know it. But again, that's company culture, right? I'm not the deal guy. Being willing to listen to that inconvenient truth, as you said, Drew, you know, bad news doesn't get better with age. I worked for quite a few people who over the years, that was the mantra. Bad news does not get better with age. You're better off communicating that as soon as you possibly can. And as an organization, you have to be able to, you have to be willing to listen to that bad news.

Greg Lozenak: Yes. Yes. Very, very true. My son bought a house a couple of years ago and he asked me to come look at something and it turns out there was a small water drip in the roof and it was running down the exhaust vent for the dryer and it was collecting lint and he's like, ah, it's not much water. And I was like, any water in your house outside of those pipes is a problem. Like if you don't fix this now, mold, rot, yada, yada, yada, yada. Like you, some things you cannot wait on. This is not like the, you know, the vacuum went out in a double seal window and I can't see as well. That's different. Yeah. So this is one of those things that here's a piece of data that's going to cost you thousands later or hundreds now.

The Role of Technology and Data in Real Estate

Bill: I think when you start talking about acquisition and data, I think your tech stack is part of that, right? You're acquiring software, you're acquiring applications and there, it, something may look like the shiny new toy or low, Hey, look, a squirrel. There's another squirrel, right? But if you're not conscientious about how you're building your tech stack, you can do more damage to your company than good, right? More damage than good. I remember in a situation where, you know, I looked at, came into an organization about six months in, kind of got my feet on the ground, started looking at this tech stack that we had. And it was so disjointed and so duplicative that our onsite teams were going crazy trying to manage all these different softwares, set aside just that many usernames and logins, but just trying to manage the data from it. And what becomes your source of truth, right?

Drew: And earlier on in my career, I was a big proponent of industry best software, right? You got to have the industry best, whatever it is with the thought that one plus one plus one would equal something greater than three. But my experience was that that wasn't the case. In some cases, it equals something less than three. And you might be better off instead of having the industry best software or the industry best application or whatever, taking the second or third and having fewer pieces of software to integrate, right? Fewer things to break down. And now you're getting that one plus one plus one might equal just three, but you weren't getting that with the best of breed softwares that we were trying to put together. So sometimes you get a back off of that and just say, this is good enough and it's going to get me to at least three, if not something more than three.

Greg Lozenak: Mm-hmm. Yeah. I mean, we're dealing with something like that, literally. I mean, maybe again, this afternoon with a commercial multi-tenant client that's, you know, has a maybe a quarter million square foot of parking structure and it's just a kind of a change in management of that structure and the systems, the conversation about systems that go along with it. And it's just so critical to do everything that you just said, right? To make sure that it's sized appropriately. It's not oversimplified, but at the same time, it's not overcomplicated either in terms of all the things that need maintenance. But then also there's that word again, life cycle. I feel like we come back to that word life cycle all the time because here we are having a conversation with this potential management company that's going to be managing the parking situation here in 2026. But the way we deal with that is we think, okay, that's great. We're going to design this and make it right. But let's also think about 2027, 2030, 2035. Is it going to be them that's going to be managing it? Maybe so, maybe not, but either way, we want to be able to make sure that the life cycle of all of these operations continue on seamlessly, regardless of what happens to the entity that's managing it going forward. Those conversations can be very tricky because not everybody wants to think like that, but it's in the best interest of ownership and the investor and the asset.

Bill: Well, and when you think about it from talking about complexity of operations and where things get disconnected, when you think about the site team and how many different pieces of software or applications that they have to interact with, how many dashboards do they have to have open to run their business? It isn't just one. I don't care who the PMS is. You have to have more than one dashboard open to fully understand what is happening at the site level. And from a site perspective, you shouldn't have to be a genius to run a property. And I'm not saying we don't have smart people running properties. We have some really smart people running our properties. I was at an organization where we took a picture of a brand and started carving it up and looking at all the different pieces of software that our onsite teams had to deal with, and I ended up saying, I was like, look, I could never be a community manager at this company because I'm not smart enough. I just, it was easier to be the COO than it was to be an onsite manager.

Drew: And so I think ultimately what we've got to get to as an industry is there's got to be an operating system that you can kind of lay over everything. And that operating system at the site level needs to pull in all the data from the different, different softwares or different dashboards into one dashboard and say, Hey, here's what's happening at your property 30 days from now. This issue right here today is going to be a problem 30 days from now. So here's what you need to do about it. Or here's the thought process that you need to go through in order to prevent that from being a problem. And I think, you know, I've talked with others that, you know, look at your PMS as the source of truth. Your PMS runs the business, but your operating system, whatever that is, runs the property.

Greg Lozenak: We talk about this an awful lot on the show, Greg, but in the book too. PMS is just what is tenant facing leases and maybe financials, but the OT stack, not the company's IT stack, but the OT stack is often neglected, like multiple networks, a plethora of systems. Like you just shared an example with silos of data we might see in that 300,000 or 250,000 square foot building Drew just mentioned, we might, if we hadn't designed this one, say we just go into audit one or do a review for digital. We might see a dozen networks and 15 systems. I'm not saying you don't need the 15 systems, but you don't need the dozen networks, physical networks, right? There's congestion management problems just from that, but somebody paid for the dozen networks that were not needed. And then they're maintaining a dozen networks, but they're not mapped or monitored, so it's not, our big point here is digital and technology and data are an asset that should generate income. If it's an expense burden, it's not being done right. And then you have the operation layer. So I'd go further and you said one dashboard, I'd go further and say one because you can display that on a dashboard or you can turn that properly into being autonomous. Okay. I see something coming down the pipe 30 days from now, like you said, you can program that the next time it sees it, it just takes an action. And then over time, the building not just becomes smarter, it becomes more autonomous and the people.

Greg Lozenak: Site can deal with tenants and tenant problems and improving tenant experience, not trying to fit these things that just keep breaking or, I don't know, lights on all night or too cold here or pump doesn't work over there, et cetera, et cetera. So we genuinely believe that the digital infrastructure, including the data stack, should be part of diligence, should drive value. We see them in forward properties, we see them going for exorbitant premiums, not just NLI, but somebody is paying a quarter million dollars more because it's got a good tech stack or because it's got good data or more than that. If you can prove it's making you money, it flows into the NLI.

Drew: Yeah. And I think- Yeah, it's a very powerful- I think that data lake comment, that's huge, right? Because that's what it's all about. To get to that one dashboard, I have to have that data lake. When you talked earlier about underwriting consumptions and where they tend to break, organizations that I was with, we always looked at how we were operating our own properties, right? When you underwrite a property, you got to underwrite the revenue and you got to underwrite the expense side. From an expense side, companies typically layer in how they operate a property. And then you look for outliers, like, is there a contract for this network and that network that I have to account for for a period of time?

Greg Lozenak: And then when you underwrite the revenue side, from a sales standpoint, because we're a value add in a lot of the organizations, you never get credit for running a property higher than 95% because nobody's ever going to underwrite. The occupancy at 95% and underwriting. The only place I think I've ever seen that happen was buying assets in California. We do underwritings 97% because California was just so tight. So we always tried to run, try to keep our occupancy between 92.5% and 95% as long as we were driving rents, right? Because a buyer would say, oh, this company sucks. They're running that 92.5%. Great, underwrite 95%. But now you're starting with my rents, which are higher because I've been pushing rents harder, right?

Drew: But from an expense standpoint or operating efficiency standpoint, how we're operating our properties today might be favorably impacted by that tech stack. And I have to have time to get that tech stack in place to operate that newly acquired property as efficiently as I'm operating our existing property. So that could be a situation where the underwriting tends to break because day one, it's assuming, hey, we're going to run this as efficiently as we're running our other assets. And that may not happen.

Defining Success with Software and AI in CRE

Greg Lozenak: So when you're speaking to data too, I think one of the other things that you as an organization, you have to define what success is with a particular piece of software, right? Whether it's AI or some automation or even your marketing programs that you're using, because a vendor is going to tell you what success looks like with their particular slice of your tech stack. But that particular slice of tech stack doesn't live by itself in your organization. So something as simple as it's driving this much traffic to your property. So your closing ratios are going to go through the roof. Well, what else am I doing that could potentially impact my closing ratios and getting residents into the property?

Drew: I was reading an article this morning before we got on this that talked about AI and why AI is fantastic and AI and automation, you're taking out some of that personal interaction with the resident. So yeah, I might be driving more traffic because I'm using a particular marketing company or marketing application, but it's not getting through the pipeline any faster or in any greater volume because I've got a disconnect somewhere else. So as an organization, you have to define what success looks like with a particular piece of software versus just a vendor coming and saying, hey, we're doing great things for you. You might be doing great things in the silo, but I don't operate in a silo.

Greg Lozenak: We do talk a lot about how you own the property, you're the customer. That software vendor might be market leading, might be huge, but their roadmap doesn't necessarily match your roadmap. So you're the customer, you should still drive this relationship. I mean, you wouldn't let a car dealership sell you the car you didn't want. Why would you buy a piece of software from somebody who didn't have the same vision that you did? And it's just conversational. I'm not saying there's a bad company out there. There's different cultures and different visions. And by not sharing that with the vendor, we actually see people giving up control inadvertently, but they just give up control unintentionally because they're really looking at technology as an expense and I have to do this versus using it as a lever to drive valuations and income.

Drew: So I appreciate your experience, Sherry. You gave me a perfect example too. So I didn't really have anything to add other than the data was at the core of it. But if you don't own your digital infrastructure, you can't get the data. You might own it, but you don't have it. You can't use it. And I look forward to the day when an underwriter says, I'll value that data lake. Insurers already do, but I can't wait for the underwriters to grab a hold of this concept.

Bill: All right. Well, what do you think? Should we head to the extra floor here, Bill? Have you got anything else? No idea what the answer is. Greg, you ready for the extra floor? You even know what it is? Good. No pressure. Well, okay. So everything up to this point has been conversational, free form, free flow. Examples are great. Now we remove all those rules and it's the extra floor, we just call it that because it's like just quick three questions, like gut answers, whatever first comes to your mind. So the audience knows you instead of talking about real estate. It's a great disclosure.

Personal Insights and Career Advice from Greg Lozenak

Greg Lozenak: Exactly. It's more about, yeah, exactly. It's all about you and not so much about the industry that we've been talking about. So number one, what's the best piece of career or life advice that you think you might've ever received?

Bill: Wow. I was probably too stubborn when I was younger to even hear the career advice, let alone take action on it. I can tell you from my experience, you have to be open to the opportunities as they present themselves. You have to be open to getting outside of your comfort zone and trying something the next level up or the next floor up, as you just said, it's going to get you outside of your comfort zone and you might fail the first time, but you're going to succeed the second time and learn from, and I say fail, it may not come out as perfect as you thought it would, but you're going to learn something, you're going to get some bumps along the way and you're going to learn from it.

Drew: So Greg, what's one habit or practice that consistently makes you more effective?

Greg Lozenak: I'm a big believer in kind of managing, not managing tasks, but understanding what it is I need to get done short-term, midterm and long-term in order to get to ultimately where I want to be long-term. So I use whatever Outlook or Gmail and I put tasks in there or I might put a task in there, but then I'm going to go time block it in my calendar to make sure that I'm not going to schedule any calls or any meetings because in this one to two hours on this day, I need to figure out or get done this particular task or project.

Drew: Yeah, it's good to protect that all important asset of time. All right, third, final question. Do you consider yourself an early bird or a night owl?

Greg Lozenak: I am very much an early bird. My brain thinks better in the day. I think I actually worked with this woman and we had a running joke that after 3 p.m. in the afternoon, the only way we could communicate was with memes, just memes back, but you know.

Bill: Well, what time did you start, right? You started at 6 or 7.

Greg Lozenak: Exactly, right? So that's really understanding yourself and understanding when you're most effective, right? And then planning your day accordingly. But I also would communicate that to the folks that I worked with. If you've got a difficult task or conversation or problem that we need to solve, get me earlier in the day than later in the day. You know, let's both talk about this while we're fresh and we can look at it from all perspectives. But again, that's understanding yourself more so than other people understand you. Understand yourself and then communicate that to others so that you can work more effectively together.

Contact Information and Closing Remarks

Drew: So Greg, how can our listeners contact you? How would you like?

Greg Lozenak: Sure, they can reach me at my email address, which is gregory at gjlrealestateadvisory.com. Or you can get me on my mobile at 312-622-8139.

Bill: You're the second person of all the shows we've done that gave their mobile number right on the podcast. So kudos to you. Two out of, I don't know, we're pushing shows now. I do remember that thing that I said I forgot. I think when you're talking about career advice, if you want to grow in an organization or an industry, you have to see yourself as having a seat at the table. You might have a seat at the table, but if you don't view yourself as having that seat, you're not going to be seen in that light. What I mean by that is you can be in a conference room with executives of an organization and there's a conversation going on. But if you're reluctant to participate in that conversation, you're not adding to that conversation and that's going to be seen. Whether it's seen directly or indirectly, the other folks, the people that are at that table are going to pick up on that. So if you want to grow in an organization, you want to grow in your career, you have to see yourself as sitting at that table when you're there or being able to sit at the table as you grow.

Drew: You're projecting a positive image of yourself, not just imagining what it'll be. You know it's coming. Yeah, I love that. Well, that's why it's the extra floor because you got to share that instead of just real estate, a real estate finance or underwriting what we talked about today.

Bill: Well, Greg, thank you very much. And thank you to all the listeners out there. And as Drew said to start the show, don't forget to like, follow, subscribe, share an episode, invite somebody to be on the podcast, but take a hold of this movement, the Peak Property Performance and help us use data and digital to change this industry. Everybody's trying to wrap their head around AI and you can't do it without digital strategies. So thank you again, everyone. Look forward to the next episode.