TABLE OF CONTENTS ABOUT THE AUTHORS IX SECTION 1: Introduction to Troubled Properties 1 Common Causes of Troubled Properties 1 The Real Estate Manager s Role 3 Ethics in Managing Troubled Properties 3 The IREM Code of Professional Ethics 4 Article 12: Duty to Tenants and Others 4 Article 10: Compliance with Laws and Regulations 5 Ethical Self-Tests 5 About this Key Report 6 SECTION 2: Economic Downturns in Real Estate 7 The Real Estate Cycle 7 Economic Downturns from the Past 9 Real Estate Downturn of the Great Recession 9 SECTION 3: Defining the Problem of a Troubled Property 11 Identifying the Types of Problems 11 Physical Issues 11 Management/Leasing Issues 12 Ownership Issues 12 Market Issues 12 Financial Issues 13 Prioritizing the Issues 13 SECTION 4: Analyzing the Troubled Property 15 Establishing the Basics 15 Analyzing the Physical Condition of the Property 16 III
Inspecting Mechanical, Electrical, and Plumbing (MEP) 17 Examining the Financial Stability of the Property 17 Determining Where to Begin 18 Assembling Your Inspection Team 18 Examining Functional Obsolescence on the Property 20 SECTION 5: The Management Plan 23 Establishing the Research Requirements 24 Executive Summary 24 Purpose of the Study and the Client s Objectives 25 Property Description 25 Managerial Description 26 Income and Expense Analysis 26 Market Analysis 27 Region 27 Neighborhood 28 Comparable Properties 28 Issues and Concerns 28 Identification of Alternatives 29 Testing of Alternatives 30 Cash-on-Cash Rate of Return 31 Value Enhancement 31 Net Present Value (NPV) 31 Internal Rate of Return (IRR) 31 Recommended Courses of Action 32 SECTION 6: Marketing for the Residential Profile and Commercial Property Tenant Mix 39 Evaluate the Property from a Leasing Perspective: Why is it Troubled? 39 Residential and Commercial Tenant Profile and Mix 40 Residential Profile 41 Commercial Tenant Profile 42 Developing a Marketing Plan 43 Regional Analysis 43 IV
Neighborhood Analysis 45 Competitive Analysis 47 Time-and-Rate Problem 48 Evaluating the Leasing Team 48 Creating the Marketing Plan 49 SECTION 7: Effective Management Operations 53 Qualifications of Your Management Company 53 Getting the Property under Control 54 Establishing Priorities with the Tenants and Public Officials 55 Accounting and Budgeting 56 Banking, Third-Party Contractors, and Service Agreements 57 Work Orders: Daily, Critical, and Long Term 57 Creating a Solid Staffing Plan 58 Stabilizing the Management Plan 59 Reporting the Financial and Physical Standing of the Property 60 Benchmarking the Property 60 SECTION 8: Repositioning Troubled Properties 61 Understanding the Market Cycles 61 Dealing with Space and Design Issues 63 Identifying Problems for Shopping Centers 63 Poor Visibility 63 Space Size Too Deep 64 Space Size Too Large 64 Space Size Too Narrow 64 Oddly Shaped Spaces 64 Malls that are Too Wide 64 Extra Hallways in Malls 65 Unanchored Wing or Second Level of a Mall 65 Anchored Tenants Grouped Together 65 Smaller Enclosed Malls 65 Identifying Problems for Office Buildings 65 V
High-Load Factor 66 Bay Depth 66 Identifying Problems for Residential Properties 66 Issues with Design 66 Value of Floor Level 68 Cost-Effective Alternatives for Repositioning Troubled Properties 68 Choosing Alternatives 68 Overcoming Reputation 69 Lender Participation 69 SECTION 9: Rehabbing Residential and Commercial Properties 75 Improving the Physical Structure 75 The Real Estate Manager s Role during Rehabilitation 76 Determining the Property s Highest and Best Use 78 Forecasting the Marketing and Leasing Plan during Rehabilitation 80 Conducting the Market Survey 82 Working with Existing Residents and Commercial Tenants 83 Managing the Building s Operations 83 Managing the Property after Rehabilitation 84 SECTION 10: Residential and Commercial Tenant Retention 85 Damage Control 85 Communicating with Residents and Tenants 86 Deciding What to Communicate 87 The Foundation for Tenant Retention 87 Lease Renewal Techniques 89 Using Social Media to Retain Tenants and Residents 90 Following Through with Promises 90 Training Staff to Help Retain Tenants and Residents 91 Scheduling Brainstorm Sessions with Staff 92 VI
SECTION 11: Restructuring Commercial Leases to Save Tenants 93 Evaluating the Assistance for Struggling Tenants 93 The Market Condition 94 The Financial Condition of the Building 94 The Cost to Replace a Tenant 94 The Building s Loan Document 95 The Tenant Requesting Assistance 95 Requesting Financial Statements from the Tenant 95 Requesting a Business Plan from the Tenants 95 Evaluating the Tenant s Sales 96 Non-Direct Monetary Assistance 96 Monetary Assistance 97 Renegotiating the Lease 98 SECTION 12: Use of Vacant Space for Shopping Centers 101 Types of Temporary Tenants 101 Specialty Leasing Programs for Malls 102 Leasing Retail Merchandising Units (RMUs) to Tenants 103 Leasing Parking Lot Space to Temporary Tenants 103 Merchandising Vacant Spaces 104 SECTION 13: Refinancing or Restructuring the Loan 107 Understanding Classification Criteria Utilized by Lenders 107 The Desired Outcomes of Negotiating the Loan 108 Getting the Lender s Attention 109 Successful Strategies for Negotiating 110 SECTION 14: Raising Equity 111 Property Cash Flow 111 Ownership Cash 111 Cash Reserves Held by the Lender 112 VII
Insurance Proceeds 112 Cash Call to Existing Partners or Investors 112 Restructure of Existing Loan 112 Second Mortgage 113 Mezzanine Equity Loan 113 Refinance Existing Loan 113 New Partners or Investors 113 SECTION 15: Receivership and Foreclosure 115 The Role of a Receiver 115 Defining the Receiver s Duties 116 The Length of the Receivership Assignment 116 The Foreclosure Process 117 Receivership Opportunities 117 Receivership Liability Issues 118 SECTION 16: Developing an Exit Strategy 121 Factors to Consider When Developing an Exit Strategy 121 The Owner s Likely Hold Period until Sale 122 The Physical Condition of the Property 122 The Fiscal Condition of the Property 122 The Profile of the Likely Buyer 123 The Sales Market for Similar Properties 124 The Financing Available to Buyers 124 INDEX 127 VIII