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 façade 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
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