Turning Round Distressed Properties

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Forging Ahead

Professional real estate managers looking for a challenge and rewarding job would do well to broaden or expand their exposure to distressed real estate. The opportunities for this work will increase during the long term recovery from COVID-19. "The next few years are going to be huge," says John Hatton, CPM.

There is no one-size-fits-all solution, so the role of manager is never boring. Every asset is unique and every aspect of that asset's operation – including marketing, leasing, human resources, and financing – needs to be reviewed, analyzed and coordinated with the owner.

However, all distressed properties have one common need: a planning process to outline a turnaround. The process includes developing a comprehensive management plan that addresses all of the challenges in transforming the property into a viable investment for its owners and a valuable asset for the community.

The planning process begins with the definition of the problem or the chain of problems.

Developing a team, a plan and a process

First, the property manager needs to build a multidisciplinary team to deal with issues related to the construction, operation, marketing and general market conditions of the property. This group also helps define measures to achieve the owner's goals. The team could include architects, contractors, consultants, leasing brokers, and mortgage brokers.

The planning process for the distressed property begins with the manager defining the problem or chain of problems. Insufficient cash flow can result, for example, from low utilization. Upon further investigation, the manager could determine that the low occupancy was due to delayed maintenance that resulted in poor curb appeal or poor property visibility.

During the planning process, the manager takes into account questions such as:

  • Are the challenges related to physical problems? Are there structural, constructive or environmental problems such as asbestos or mold?
  • Does a bad tenant mix create problems?
  • What are the amenities and parking facilities like on site?
  • Are company policies and procedures in place and are they being followed?
  • Is the staffing sufficient – too much or too little?
  • Does the property have a leasing plan?

The next step is to address ownership and financial issues like lack of working capital or redirecting cash flow. Then the manager is ready to prioritize issues that will most affect financial stability and achieve the owner's goals. Managers may need to resolve financial problems by negotiating a mortgage deferral or temporary loan adjustment with the lender. This could give more time to fill vacancies or increase property cash flow so the property can meet debt service coverage or other requirements from lenders.

Of course, the economic circumstances that accompany distressed properties are unfortunate. But real estate managers who excel at communicating, working with a diversified team, analyzing issues, and developing game plans can help improve a property's performance.

Editor's Note: This article is taken from the article "From Struggling to Prospering" published in the July / August 2021 issue of the Journal of Property Management.

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