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Commercial Distress
For commercial property owners, understanding receivership and some simple tips for salvaging value can deliver relief and diminish the chances of foreclosure.
Given the current economic climate, it's increasingly difficult to ignore the situation of many investors, owners and financial institutions dealing with distressed or underperforming properties. And commercial real estate experts are quick to note that the climate isn't expected to change overnight.
So, as an owner of a business, property or other asset, what options do you have for maintaining value and even avoiding foreclosure?
No Prize for Second Place
According to a fourth-quarter 2009 report by CoStar Group Inc., Florida has the second-largest number of distressed commercial properties in the nation. At the time of the report, Florida's distressed properties included 3,469 office buildings, 3,576 industrial complexes and 715 shopping centers. If you've driven around Central Florida recently, you've probably noticed the vacancies.
Unfortunately, as more loan notes mature each month, it's likely that bankruptcies and foreclosures will continue throughout 2010. At times, it may seem as though there isn't much the average property owner can do. Yet, there is. By educating yourself about the available options, you can put your property in a better position to withstand current market conditions. Whether it is nonperforming (currently in foreclosure) or underperforming (headed toward foreclosure), or you're lucky enough to have a performing asset, working with a receiver or property manager can greatly increase your chances for long-term success.
Benefits of Receivership
When a property is involved in a legal process, such as entering into bank-owned foreclosure, the court handling the matter often appoints a trustee/receiver. In some cases, the bank might recommend a specific company, instead of a lawyer, to manage the property. Commercial real estate management companies gain receivership to save properties - nonperforming and underperforming - from further distress.
A receiver is a neutral party whose first priority is to act as a financial manager. The receiver fills the critical role of protecting the property and the interests of the parties associated with it. In this role, the receiver collects rent, renews leases and provides monthly financial statements. The receiver's key role is to secure the rental income and preserve the asset.
In addition to serving as financial manager, the receiver completes a full property assessment to determine whether money is being spent efficiently. When working with a property, one of the first things I do as a receiver is assess operating expenses, an area prone to overspending. Take landscaping, for example. Before the recession hit, many business owners got a quote from only one landscaper, and if it fit into their budget, they signed a contract. A better approach is to bid out all maintenance to a minimum of three companies, to find the most cost-effective resource. Under this scenario, one former client realized a $300,000 saving in annual operating expenses, just by conducting an energy audit.
Proactive Approach to Tenant Retention
Even if you own a performing property, the economy puts you at risk of losing tenants, who may leave for their own financial reasons, including moving to a different property because another landlord has lured them with lower lease rates or incentives. I work with my clients to develop a proactive strategy for successful tenant retention. Here are some of my recommendations:
Don't wait for leases to expire. Contact renters six months to one year before their lease ends and offer them a 10 percent discount if they sign a five-year contract. Don't get stuck on pre-recession pricing levels. It's smart to lock renters in now at a slightly discounted rate and avoid having to attract new tenants, at possibly a significantly lower price, in six months.
Market aggressively. If you don't negotiate lease rates and incentivize your renters, they'll find someone who will. Make it known that you are offering discounts and added services to drive traffic to your property.
Sign only approved tenants with a high potential for success. In a tough market, it's tempting to compromise on tenant quality. However, it's important to avoid payment issues by making sure all tenants are credit approved.
Turn to the Pros
Without appropriate professional guidance from a commercial real estate expert, a nonperforming or underperforming asset is a liability to property owners, lenders and tenants. Contact a property management firm to develop a strategy for stabilizing your property's capital and revenue. It's a smart investment in your financial future.
