While the COVID-19 pandemic has boosted technology in commercial real estate, there is still plenty of paperwork involved with any kind of transaction, from leasing, to paying taxes, to acquisitions/dispositions. As ESG focuses on transparency and governance in addition to sustainability and regulatory pressures, Connect CRE caught up with with Aashish Mehta, CEO of nRoad to ask him about how commercial real estate can move from excessive data generation documentation and paperwork to more streamlined processes.
Connect CRE: How and why is the real estate industry so wrapped up in red tape? What are some of the causes of too much documentation and lack of standardization?
Aashish Mehta: In short, it’s the regulatory environment. Red tape and paperwork str a natural byproduct of any regulated industry such as real estate and specifically real estate investments as they are subject to many disclosures.
Let’s take a look at one of our clients, a large real estate investment fund with a focus on affordable housing development projects (investments); these are later managed by a property management company. Like many funds, this specific client is under a regulatory requirement to provide investors with periodic updates on the funds’ performance. These updates come from source documents submitted by each of the property management companies including financial statements, rent rolls and insurance certificates. So, with approximately 1,500 investments, our client was required to review 20,000 documents in different forms and formats.
Connect CRE: Why is the industry slow and reluctant to embrace technology to help with some of that paperwork?
Mehta: This isn’t specific to real estate. Industry reluctance to change comes from the perception that technology and specifically AI can’t add value to what’s considered “art work.” In other words, a process that requires deep domain expertise. We have often seen throughout the years a defensive posture from analysts and underwriters when applying AI to more complex analysis. Additionally, firms raise concerns about sending their documents or information out of their network and their removal from the multitude of checks and balances in place.
And as in other industries, much of the intelligence in a financial statement comes from management notes or other text found throughout different documents and less from the numbers alone. Property companies routinely add and remove line items on their statements each period. The common belief is that a machine can’t read and comprehend management notes and relate the notes to numbers and/or can’t handle the constant stream of incoming variability found in the submitted documents. This is due to a lack of awareness of technology and AI in the top brass of these companies.
Connect CRE: COVID-19 helped boost the use of technology in the sector real estate. From a paperwork standpoint, has that technology reduced some of the burden?
Mehta: Definitely The “burden” is not in creating or generating the actual performance report. That is table stakes in the industry and is composed of automated rules and ratio calculations and some related graphics. The burden is quick and accurate data entry. The goal is to provide investors with quick visibility into their investments.
Let’s go back to the above example of our client and the 1,500 financial statements submitted each quarter. When technology is used, data can be extracted and standardized in under one minute with accuracy above 95%. This means a 65%. Here’s what happened to the client—the team size was reduced from four to one, and 250,000 labels were added to their library over the 12-month period.
Connect CRE: What do you think is needed to help streamline processing and eliminate red tape in this sector?
Mehta: There needs to be continued market education and awareness that certain technology solutions are solving the problem. We also need to build and instill confidence in the fact that the inherent complexity of the process can be properly and successfully managed while client data privacy protocols are maintained at the same time.
There are various approaches to solving the data extraction problem and some are better suited than others for various use cases. Private company financial statements are one of the more complex uses cases with their endless variety and variability. Some firms have retreated after poor experiences with template-based or RPA solutions. These approaches were tried because, in part, the solutions were deployed on premise.
But industry red tape isn’t going away, and financial statement standardization continues to be a future oriented discussion. The red tape in the process is occurring at the very beginning, at the data entry stage or the “front door” of the process. Once entered, report generation is generally considered streamlined.
Specifically, firms should understand that the information need not leave their private network. The entire process, from statement categorization to data standardization, can be securely deployed while protecting client data and the firm’s IP. The sector is poised for efficiency.
Aashish Mehta is CEO of nRoad, an artificial intelligence platform that converts unstructured data and documents to help streamline paperwork and processes.
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