As Landlords, Banks Need Help

Consider the consequences of the overbuilding of office and retail space in many parts of the country during the boom of the 1980s.

Commercial mortgage loans more than doubled between 1982 and 1985, from $11 billion to $27 billion, fueling the current oversupply of metropolitan and suburban office and retail space.

Bad Timing

Between 1985 and 1989, insurance companies supplied $20 billion annually to finance commercial projects. Many of these loans, for terms of five to seven years, are now due - at a time when new mortgage money is not readily available.

Since 1987, retail sales per square foot have been dropping while the construction of new retail space has continued.

Apartment buildings are also suffering. Rental increases have failed to keep pace with rising costs - of operation, capital replacements for aging properties, environmental issues such as asbestos removal, and government regulations such as fire and building codes.

A Wave of Defaults

The current liquidity crunch in the banking industry has thinned the ranks of lenders. Those that remain are underwriting more conservatively, and therefore providing fewer financing dollars per property.

The result? Many property owners are failing to meet the terms of their loan agreements. This has led to a wave of defaults. Banks, in turn, are foreclosing on properties and taking possession when an acceptable workout plan is not forthcoming.

In most cases, the banks' objectives are to liquidate the asset and eliminate the bad loan. The problem is how best to do it.

Unfamiliar Role

In the meantime, more banks are being forced to become owners. Few have accepted this role gracefully. The intrusion of needed workouts has disrupted the industry. Larger institutions have created separate workout departments, assigning existing staff, appraisers, and other support personnel to the task.

Travelers Corp. for example, created Travelers Realty Investment Co. to act as its workout division. Meridian Bank set up Meridian Properties. In some cases, these workout divisions actually manage properties obtained through foreclosure. Usually, however, the management services are delegated to local management companies for a fee.

Meridian Properties, for example, manages office buildings. Yet, recognizing that its expertise is limited, the unit assigns to outside sources the same responsibilities for other types of income properties.

A common mistake in taking over an underperforming property is to identify the single most glaring deficiency and engage help in that area only. There is a tendency to see various real estate disciplines such as leasing, management, and consulting as mutually exclusive.

Multifaceted Approach Needed

Take, for example, the bank that hired a well-known leasing agent to solve the vacancy problem in a foreclosed office building.

This did not solve the problem. Operational and physical deficiencies prevented the leasing of the building.

Banks, in their role as property owners, should not underestimate the importance of a multidisciplinary asset management plan. A one-dimensional approach is usually insufficient.

Savvy bankers are now turning to experienced asset management firms.

An Expert and a Partner

Such firms protect a bank's interest in two ways: as a facilitator to develop and achieve the banker/owners goals, and as an effective intermediary in the marketplace.

Banks need a real estate partner and expert.

As the marketplace increasingly turns bankers into owners, banks are relying on professional asset management firms to act as a real estate partner and expert.

Most critical is the firm's ability to guide the client through a highly competitive marketplace.

For the management firm, this effort should begin with the development of a plan that charts the course of action intended to meet the bank's objectives. The plan should also include an environmental audit.

The firm must keep the plan on course, adapting as necessary until the objectives are met.

Duties of Management Firm

Acting as agent and intermediary, the firm will direct the property's operation, including the coordination of all leasing efforts with the brokerage community, the delivery of tenant services, tenant retention, and planning and consulting.

My own firm was recently appointed to collect rents for a $6 million apartment property on behalf of the first mortgagee.

The first problem was that, though the bank wanted to control the income, it did not want the responsibility of operating the property. As a result, we were asked to monitor the property's operation but not to intercede in its daily management.

Understandably, this arrangement had to change. It was likely that the owner, denied the rental income, would soon stop paying bills, including payroll, forcing the bank to take full possession or adjust its position.

Acting as the bank's agent and consultant, we developed a plan that persuaded the bank to take possession. We then effected a smooth transition from without interruption of tenant services.

Cash on the Barrelhead

In another case, we conducted a property review on behalf of a New York lender acting as mortgagee in possession of a local income property.

We recommended specific improvements to enhance the property's occupancy and salability.

We were then appointed as managing agent to operate the property and implement the plan.

Seven months into our contract, we sold the bank's property for cash.

What is needed in a quality asset management firm?

The criteria relate not to size or "brand name," but to how effectively the management team can work in partnership with the bank to protect its interests.

Asset management has become increasingly specialized. The firm intending to solicit financial institutions must possess a strong commitment to service, be able to adjust to the client's ever-changing needs, offer a talented staff, and provide comprehensive, in-depth monthly reports.

Banks seeking such assistance should consider certain industry credentials, such as the CPM (certified property manager) and AMO (accredited management organization), which are awarded by the Institute of Real Estate Management of the National Association of Realtors.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.