I recently ran into a CEO I hadn’t seen since I’d helped his firm create a set of operating guidelines over five years ago. He told me how indispensible they’ve been over the years—and that the company was using them even today.

It reminded me of the importance of instituting such guidelines and reinforced something I’ve long known to be true: Companies with relevant and current operating guidelines (let’s call them OGs for short) find much greater reception from potential investors and joint-venture partners. They make internal processes more efficient, they help inform strategic business moves, and they can provide a critical guidepost for many key decisions.

And in a very common situation today, investment firms that report via net asset values are increasingly moving to fair value reporting that reflects more current market-based values, increasing transparency for the firm’s investments. OGs make this process much less painful by documenting procedures for valuations—specifically, how values are determined and how they’re reviewed and approved internally.

What Are OGs?

OGs are a basic business tool in many industry sectors, but the entrepreneurial nature of real estate has made them all too rare in this sector. Which is a shame, since OGs are a powerful tool that can inform key business decisions and provide a navigational starting point. OGs don’t constitute a strategic plan or growth strategy, per se, but an outline—sometimes in detail—of company operations and structure, procedures it follows along key business lines, and the manner in which the firm generally operates while attempting to minimize operational risk.

Lately OGs have gained renewed focus because they’re being demanded by large institutions, lenders, and potential partners who want a clear understanding of a real estate firm’s practices and procedures. Partners and investors want to know how a company does what it does and see how the executive team runs its shop. Lenders might offer lines of credit based on mere collateral, but a business partner seeking aligned interests and mutual benefits wants much, much more.

How Are OGs Used?

Many experienced real estate firms are becoming Registered Investment Advisors (RIAs) so they can attract and manage investments of high net worth investors, pensions, and institutions. Federal regulations and qualifications for RIAs are stiff, and one of the requirements? You guessed it: well-documented internal procedures—essentially OGs. In a post-Madoff, post-recessionary world, investors want squeaky-clean, transparent investment partners.

In fact, OGs are relevant for most any type of real estate firm: developers, operating companies, property or asset managers, fund managers, non-traded REITs, organizations in pre-REIT status, and many others.

Let’s look at a few examples.

A real estate fund manager who for many years was successful in opportunistic real estate wanted to expand his success into a new line of business, a “core” investment fund. The firm needed OGs for this new fund in order to better attract capital and explain in detail how the new team it brought in to execute the new strategy was carrying the corporate culture of the existing firm. Detailed OGs helped define the new investment strategy, procedures, and execution.

Some investment funds, private equity firms, and RIAs are also using OGs to respond to industry pressure for increased transparency. Real Estate Information Standards (REIS) are gaining acceptance, and some investors are even requesting that their partners use them or are more favorably inclined toward firms that use REIS.

In addition, firms find that OGs are very helpful in hiring new people, especially executives whose cultural and technical fit is crucial to company success. While new team members can often bring valuable change, coming to a firm with operating instructions that act as a road map greatly reduces the need to learn on the job.

And finally, even well-established operating companies, pension funds, and institutions may need to reevaluate OGs because of changing industry and client needs. Codifying and documenting procedures offer the kind of transparency and public company–style reporting that are increasingly the norm, and they can help investors better understand the company’s underlying operations.

What Do Effective OGs Look Like?

A typical OG document has a number of sections that address common business practices but might also cover procedures that entail higher than average risk attributes. Sections or chapters might include:

  • Objective or overview that explains how each process is handled, such as acquisition approval and procedures involving multiple business groups (such as acquisition and asset management) so there are checks and balances and a system in place when there are staff changes, unique opportunities, or potential disruptions
  • Business plans for the company and key business lines
  • Quarterly or midyear forecasting
  • Asset management reporting practices
  • Disposition processes, including steps for solicited and unsolicited offers
  • Valuation processes for properties and investments, especially if operating under fair value reporting

A Tool for Growth

The process of creating OGs can be transformative. Midsize firms and even small firms with growth plans need good OGs to get to the next level, and the exercise of developing guidelines can uncover key opportunities or avoid problems before they worsen.

Far from being a big-company issue, it’s actually most critical for smaller firms who want to be big, or at least bigger or higher-growth than they are now. The executive who thanked me for his long-ago OGs—from his perch atop a now-sizable company—couldn’t be a better example.