Focus Management Group continues its industry experience series with a look at property management and real estate holdings.
Last week, we published part 1 of this series on Crop Farming which can be found here.
With the changes in office, retail, and manufacturing space brought about by Covid-19 closures, lock downs, and mandates for additional work space and floor plan changes, real estate property management and ownership has emerged as a troubled space.
While payment deferrals have helped property owners and their tenants, those payment deferrals are being re-evaluated.
Types of Assistance
FMG has worked with real estate owners and property managers to develop plans to survive troubled times during the real estate bubble of 2008, and has begun doing the same work in 2020.
Key to this evaluation is an understanding of the costs to operate the facilities. We are able to work with the property owner and the tenants or lessees to evaluate the current and ongoing costs to operate, and costs to maintain services. Building maintenance and required capital expenditures must not be overlooked. By understanding the quality of the building, the needed capex and maintenance expenditures, and the operating costs, a property owner will be in a position to better analyze its top line revenues against its operating costs and leverage.
The next key to evaluation is understanding the debt structure, including the capital structure. Regardless of ownership structure, the debt term and payment requirements should be weighed against appraisals and future outlook to determine if the extension of terms and reduced monthly payments during this period of upheaval could be warranted.
Appraised values are going to be challenging during the next year. Many lenders have already asked for updated appraisals, and more will be asking for those in upcoming months. After the initial lockdowns, appraisals were coming in lower than expected as a result of the uncertainty. We have seen some of that reaction moderate recently, though geographic location is still impacting the extent of depressed values. The “new normal” is still evolving for office space, downtowns, and retail facilities. Until more of that new normal is identified, appraisers will feel pressure to consider the potential negative impacts in their appraisal valuations.
The full impact of new normal has not yet been felt by property owners and their lenders. As businesses evaluate work from home (“WFH”) policies, decisions are being made to reduce office space or eliminate locations entirely. As the retail trends continue to move toward delivery options, including for grocery, the property values of retail spaces such as malls, strip malls, outlots, and stand alone stores are impacted. Geographic locations are being impacted disproportionately. In downtowns where the combination of WFH and political unrest have driven office and retail use away from the area, impacts are being felt by restaurants and other service providers and the landlords and lenders to those businesses.
Working with property owners and managers to analyze their revenue stream, their operating costs, their capex needs, and the current property valuation is key to developing a successful work out strategy through 2021 and beyond. Continuing to assess the evolution of the economy in the geographic location is going to be key to successful strategies.
An example
We were able to work with a lender, its borrower property owner, and the lessee of the property to analyze everything from the operating costs, to the loan and landlord structure, to the capex needs, and we were able to understand the risks in terms of what could be the new normal for the property. In many of these situations there will not be an outcome that all stakeholders will prefer, but there is an outcome that can address the new property values, the operating costs, and the stakeholder involvement.
In another situation, we were able to evaluate multiple properties owned by the same investors and identify positives and negatives in that portfolio of properties. Investors felt that certain properties had higher longer term potential than others, and by isolating “good” and “bad” properties and working with the various lenders on a property by property basis, we were able to restructure debt to reduce lender risk while allowing investors to hold properties through to a recovery.
If a property is deeply troubled
There will be situations over the next year in which the owners will not have access to additional capital to fund debt service and those owners will not see a long term future value for the property. In those situations, Focus Management Group is able to step in and manage the property through a stabilization and eventual transition to new ownership.
We are able to manage the completion of properties that are in the construction process but have stalled.
We are able to manage commercial and residential rental properties, including collecting rents and managing the costs.
We know how to place properties into dormancy while waiting for the new normal.
We are able to drop into difficult situations
FMG is ready to work with property owners, lenders, and appraisers and brokers to collaboratively develop the best plan for a property. We are able to drop into a difficult situation and help all the parties, including the other professionals, gather necessary information, stabilize operations, evaluate options, and implement the plan.
Identify degrees of risk
Working with all stakeholders to stratify degrees of risk in the real estate portfolio will be an important portfolio analysis project for lenders and investors alike. We do not know what 2021 has in store for property owners and managers, their lenders, and other stakeholders. We do know there will continue to be uncertainty, and that is where FMG is able to lend calm to the chaos and help all parties determine the best path forward.