Friday, August 17, 2012

4 Key Points About Distressed/Foreclosed Properties

KeyPoint Partners Vice President of Property & Asset Management Bob Hayes offers expert advice on managing difficult assets for special servicers and other clients.

“So-called distressed real estate, which included properties in default or foreclosure and real estate taken over by lenders, totaled $166.9 billion in January 2012…Retail has the fourth-most distressed assets at $27.9 billion…While the volume of distressed commercial real estate properties is significant, so is the looming volume of stressed property. These properties have characteristics of concern in the short term — maturing loans, bankrupt tenants, under-performance, financially troubled owners or other significant obstacles that could potentially lead to distress in the future.”1

Although the statistics have been improving, there’s likely to be a continued stream of distressed or foreclosed commercial properties in the pipeline - perhaps in your pipeline. From the first day you take on a distressed or foreclosed property, you’re thinking about the last day you own it. A service company should have that goal in mind, too. When undertaking the management of a distressed asset, there are essential things a management company has to understand. Here are 4 “Key Points”:

1. Understand the Collateral
The lender is foreclosing on a specific piece of collateral, so certain other pieces of real property may or may not be included. In eight out of ten instances, you’re dealing with one property and one parcel. However, for example, perhaps a shopping center has a shadow anchor, in which case reciprocal easement agreements – REAs - may exist that govern any interaction between the two pieces of property. These are generally included in the deed. Be aware that an owner who has had a foreclosed or distressed property for any length of time may have tried to sell a parcel, or not conformed to requirements of an REA. Also be sure you find out about any personal property that is part of the collateral – especially equipment, vehicles, etc. that go with the property and enable its operation.

2. Look for Landlord Defaults
Be watchful for provisions of leases which the distressed landlord has not fulfilled due to lack of capital: HVAC systems, the roof, the building envelope and common area maintenance, which borrower may have been unable to maintain due to lack of capital - or lack of care or interest. Deferred maintenance accumulated under distressed ownership can become a major image issue that negatively affects the leasability of any vacant space - which there will inevitably be in a distressed property.

3. Know the Leases
Thoroughly abstract the leases for a complete understanding of the landlord requirements under each lease. Research the term, rental structure, and especially individual tenant options and/or restrictions for each tenant and each lease. A major anchor or junior anchor tenant may have multiple options, and difficult, if not downright onerous, restrictions which can inhibit the leasing process, and therefore inhibit the ability to turn the project around.

4. Own The Image
Know where the property fits in the market, and what its reputation is in relation to the community. If it’s known as a “bad property”, understand that you may be stuck with a distressed reputation, even when the takeover is complete and the turnaround has begun. This can be difficult from PR standpoint, but it’s also an opportunity: acknowledge the bad, so you can then separate yourself from it and trumpet your turnaround effort. Commercial real estate redevelopment is a dream – this is a chance to put the dream together, and take the property from what it is, to what it could be. Establish a new identity: a name change, a fa├žade upgrade or a new pylon sign can work wonders. Target appropriate tenants, or secure a high-profile anchor tenant. Of course, be sure, when courting tenants with pretty renderings, that you’ve thoroughly understood the town zoning, and know what is allowed under current by-laws and restrictions.

There are other points, but these are key, and eclipse all the others. These may seem obvious, but each contains a bewildering number of potentially confusing details, and vital tasks of various sizes. An exhaustive takeover checklist (such as the one we use) assures that no detail is overlooked. The checklist is a blueprint for everything you need to know, and to which you have to pay attention.

It takes a special set of skills, and a special way of thinking, to handle the distinct challenges of such assets. We know this because we developed those skills in the commercial real estate downturn of the 1990’s, when we were building our company. Since then we’ve handled the takeover, management, and disposition of retail, office, industrial, exhibition, and other properties totaling in excess of 10 million square feet for special servicers and other clients – like you. Let us know how we can help you.

Bob Hayes, Vice President of Property & Asset Management
BHayes@KeyPointPartners.com

Bob Hayes joined KeyPoint Partners in 1996. Bob has over 30 years of experience in asset and property management. His prior positions include three years with Recoll Management as an Asset Manager, four years with H. N. Gorin as the Director of Property Management, and six years with The Codman Company as a Property Manager. Bob holds a B.A. in Education from the University of Massachusetts at Amherst. He is a Certified Property Manager, a licensed real estate broker, and a member of BOMA, NAR, ICSC, IREM, ULI and NAIOP. In his career at KeyPoint Partners, Bob has been involved in the takeover of distressed or foreclosed retail office, industrial, exhibition and other properties totaling over 10 million square feet. Contact Bob at 781.418.6253.

1.Delta: Distressed commercial real estate continues retreat, By Mike Donnelly, The Washington Post, March 18, 2012

Company News

New Employee: Samantha Rodriguez joined the Connecticut office as a Property Manager. Samantha's most recent experience has been with CAS Construction Co., Inc…New Business: The Leasing Team will lease The Mall at Lincoln Station, in Lincoln, MA, a 34,200 s/f center anchored by Donelan’s Supermarket. Michael Branton & David Hough will handle the property.

Industry News: National

US chain store comp retail sales for July rose by 3.4% year-over-year as measured by the ICSC's tally of 22 major retail chains. Walgreen’s performance dragged down the total because of its decision to no longer be part of Express Scripts, Inc. pharmacy network, which trimmed comparable-store sales by 2.7 percentage points on a year-over-year basis. Excluding the entire drug store sector, chain-store sales rose by 4.6% in July compared with the prior year. Among merchandise categories, Apparel led with a 9.2% gain, followed by Wholesale Clubs with a rise of 5.0% and Discount Stores with a rise of 4.1%. Department Stores were up 2.5%, Luxury Stores gained 1.3%, and Drug Stores dropped 5.2%. Among individual retailers, Gap gained 10%, and Limited rose 12.0%; Costco was up 5.0%. Nordstrom was up 0.9% and Saks gained 3.5%; Target grew by 3.1% and TJX by 7.0%. Macy’s gained 4.1%, and Kohl’s by 1.7%; Rite Aid was up 0.5%, and Walgreens fell 7.0%.

Industry News: Accelerating

DineEquity, Inc. parent company of Applebee's Neighborhood Grill & Bar and IHOP, has entered into an agreement with TSFR Apple Venture LLC for the sale of 65 Applebee's company-operated restaurants in Michigan. DineEquity has sold or entered into agreements for all 510 domestic Applebee’s company-operated restaurants acquired in the acquisition of Applebee’s in 2007.…Whole Foods Market opened a record 9 new stores in the third quarter, 1 in the fourth and plans another six by fiscal year end, bringing this year’s total to 25 new stores. The company is on track to grow the chain to 1,000 stores from its current 369…H&M plans to increase the number of stores each year by 10 to 15% means about 20 new openings this year. The bulk of those will be in the West, Southwest, Southeast and South Central regions, in small cities as well as traditional large markets. H&M currently has 245 US stores…J.C. Penney opened in-store shop concepts for Levi's, i jeans by Buffalo and The Original Arizona Jean Co. in nearly 700 stores nationwide. Penney’s second wave of branded shops will open Sept. 1, and will feature dedicated shops for Liz Claiborne, IZOD, and jcp – a new private brand…By the end of 2012 Toys “R” Us will have opened 8 new stores and remodeled 13 existing locations to the side-by-side Toys “R” Us/Babies “R” Us model. The 21 stores across 13 states are representative of its strategy to bring both concepts together in an integrated store format. Toys “R” Us said it expects to operate 204 side-by-side stores nationwide…7-Eleven Inc. has signed an agreement to acquire the company-operated convenience stores of TETCO Inc. Sources put the number of stores between 174 and 185. Others put it at between 250 and 280 stores. 7-Eleven operates, franchises or licenses more than 9,300 7-Eleven stores in North America. 7-Eleven Inc. is putting 30 convenience stores/gas stations in New York State on the market. The locations were part of the acquisition of the 188-store Wilson Farms chain in 2011. Six of the sites are convenience stores only (no fuel), while the other 24 are convenience stores with gasoline. All but one site is currently operating...Vitamin Shoppe is on track to open 52 stores in fiscal 2012...Quaker Steak & Lube has opened its 50th restaurant and is on track to open 10 additional restaurants this year. The brand will expand to 6 new markets with 5 franchise groups over the next several years. Additionally, restaurants are planned to open this year in NJ, KY, SC, OH, and PA.

Industry News: Decelerating

Neiman Marcus Group will would close its 118,000 s/f store Nicollet Mall store in Minneapolis…Moody’s Investors Service has placed apparel retailer J. Jill under review for a potential credit downgrade due to failure to provide audited financial statements to its lenders, an omission that triggered a technical default on some $115 million in debt outstanding. Privately held, J. Jill  operates 225 retail stores...Sears will spin off its 1,238 Hometown and Outlet stores, as well as some hardware stores, into a separate publicly traded company. Sears has already closed five Hometown stores, eight hardware stores and one Outlet store.

Industry News: New England

Cresset Development, owner of the Seaport District Liberty Wharf complex, is putting the property up for sale. The complex houses five restaurants: Legal Harborside, Temazcal Tequila Cantina, Del Frisco’s steakhouse, Jerry Remy’s sports bar, and 75 at Liberty Wharf, a bar and grill scheduled to open in the fall. 28,000 s/f of office space is leased to Congress Wealth Management, the software company¬ R Studio, and Fama PR, a public relations firm…Outback Steakhouse will replace David Ortiz’s Big Papi’s Grille on Route 9 in Framingham, MA. A demolition crew this week razed the eatery that closed last summer to make way for a new 12,532 s/f building that will have space for up to 3 new retailers...Lululemon Athletica signed a lease for a 3,100 s/f store at the Chestnut Hill Shopping Center, the 406,000 s/f center underway in Newton, MA, joining Pottery Barn, The Sports Club/LA, Cinema de Lux, Polarn O. Pyret, Shake Shack, Pinkberry, Treat Cupcake Bar, and Bernard’s. Occupancy is expected for next year…Linear Retail Properties has purchased 2 retail condos on the ground floor of the Bryant Back Bay at 303 Columbus Avenue in Boston for $1.79 million. The condos total 2,970 s/f. One space is leased to Urban Grape, and lease negotiations are underway for the other unit…A 50,000 s/f Whole Foods will anchor the retail portion of the planned Ink Block South End redevelopment of the former Boston Herald property on Harrison Avenue in Boston, the chain's largest in Boston. Ink Block South End will feature retail and restaurant space on the ground floor with 471 apartments. The site was the home of the Boston Herald until February. Construction is scheduled to begin in early 2013…Eastern Bank of Boston and Community Bank of Brockton will merge by year’s end. Eastern Bank is a mutual bank and the Community Bank is a cooperative bank, and no premium was paid, the two banks said. Community Bank has 5 branches, and Eastern Bank has 94 banking offices in Eastern Massachusetts, in addition to 22 Eastern Insurance offices…Insomnia Cookies, a chain of late-night cookie delivery shops, is eyeing a store at 65 Mt. Auburn St. in Harvard Square. The company now has 22 locations nationwide, 17 of them around college campuses…Suburban Massachusetts French-fry restaurant, 3Potato4, is planning to expand to Boston, eyeing restaurants at the Prudential Center, the W Hotel and the Theater District. 3Potato4 serves fries only. The potatoes are organic, baked instead of fried. 3Potato4 is also eyeing expansion to New Orleans, Las Vegas and New York…Stop & Shop opened a new 65,000 s/f store at 1220 Iayannough Road in Hyannis, MA, replacing an existing store on Independence Road. Stop & Shop operates more than 400 stores in six Northeast states…TJX Cos. purchased its Framingham, MA headquarters for nearly $117 million, three months after buying a pair of Marlboro office buildings for $63 million. TJX will renovate the properties over the next several years. T.J. Maxx will open a store this fall in the anchor space formerly occupied by Borders in the Cambridgeside Galleria in East Cambridge…Stephanie's will open its third location, a restaurant at 11 West Broadway in South Boston, replacing local watering hole The Quiet Man Pub…Franchiser Five Star Equity Partners, LLC signed an agreement with Jamba Juice to open five Connecticut stores over the next several years....The former Filene's Basement store at 215 Needham St. in Newton will be sold at a public foreclosure auction on Sept. 13 following a mortgage default.

July Retail Sales Report

Commerce Department Monthly Sales

Retail sales rose in July for the first time in four months as demand climbed broadly for everything from cars to electronics, a sign that consumers could drive faster economic growth in the third quarter. Retail sales rose 0.8% last month, the Commerce Department said.

Source: U.S. Department of Commerce - commerce.gov

Treasury Yields

Consumer Confidence Index

The Conference Board Consumer Confidence Index®, which had declined in June, improved slightly in July. The Index now stands at 65.9, up from 62.7 in June. The Expectations Index improved to 79.1 from 73.4. The Present Situation Index, however, decreased slightly to 46.2 from 46.6 a month ago.

Source: The Conference Board - www.conference-board.org

Purchasing Managers Index

Manufacturing contracted in July as the PMI registered 49.8 percent, an increase of 0.1 percentage point when compared to June's reading of 49.7 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

Source: Institute for Supply Management - Manufacturing Report on Business - www.ism.ws