Bad News Asset Management

Asset managers and landlords are searching for advice on survival tips in these turbulent real estate times. I often get this question from many different real estate professionals: “Marjy, how are you surviving this challenging market”? While there is not a shortfall of sage advice during these turbulent times, the most important advise in my opinion is understanding and implementing a “bad news asset management” program. “What does THAT advise mean?” asked a stressed-out colleague. It means that you need to keep an open and honest line of communication between you and your professional circle of influence including clients, tenants, employees, lenders and vendors. Your circle of influence knows the painful reality of today’s real estate market. Now is your opportunity to build credibility and trust by demonstrating your management and leadership abilities.

2009 will clearly go down as the year of bad news management for real estate professionals who plan to have many more fruitful years in the industry. However, communicating bad news is a tough thing for many of us who have gotten spoiled by the on-going positive news in the go-go years of the past decade. Effective “bad news management” is indeed almost a specialized skill. However, be aware that your long-term clients will have a more vivid memory of how you handle the bad times versus how you handled the good times. Whether we like it or not, turbulent times usually reduce us back to the basics and “communication” is probably the most important basic skill that we utilize in relationship-driving industries such as real estate.

Here are some suggestions on how we, in our capacity as asset managers, are managing “bad news” within our professional circle of influence:

1. Timing – first, we are discussing potential bad news with our clients as soon as possible, especially if another party is involved or needs to act. For example, don’t wait until the last-minute to inform your client that the loan matures next week and you need them to wire money to fund a loan shortfall;

2. Face time – second, we initially present any potential bad news personally, rather than over the phone. Your client had the faith in you to give you business, now respect them by sitting down with them and explaining the issues. This has involved a lot of travel, but the investment is well worth it in retaining clients;

3. Action Plan – third, once we know that potential bad news is on the horizon (loans that were maturing with no replacement loans or tenants that may file bankruptcy), we present a professional action plan showing what we are doing to mitigate the potential bad news and what we may need from our client to help (if anything). The action plan needs to be thorough and concise and show the consequences of the bad news. For example, if you have a loan in default and there is even a small chance of foreclosure, then you should present an action plan to remedy the situation including the consequences of “forgiveness of debt” associated with a foreclosure;

4. Honesty – again, our clients know that there is turbulence in the market and they want an honest presentation on how we are handling the situation. Yes IT IS bad news and yes your client may be angry, but at least they are getting an honest interpretation from you.

Times of crisis are your time to demonstrate your leadership ability. How you handle “bad news” can make or break the trust that your circle of influence has in your abilities. In the past year, we have organized a structured asset management plan for every one of our clients, whether there was good or bad news, just to touch base and showcase our leadership. We have had a few clients express grave concern; however the vast majority have been tremendously appreciative and supportive of our efforts. It was the ultimate compliment when one of our investors recently said that they were so impressed with our handling of the asset management plan to weather the current economic storm for one of their investments, that they were recommending us to other colleagues. Sweet!

ACBR/GIRE Seminar: June 26th Powerpoint Presentation

On belhalf of Marjy I would like to thank everyone for coming to the workshop.
By popular demand I have uploaded the powerpoints used to this post.

Should anyone have any questions, Marjy will be happy to answer them for you!

Have a wonderful weekend!
Susan

GIRE Powerpoint
Crisis Asset Management-Harvard Business Club

Protected: June 13th Toxic Asset Management Workshop: For Attendants Only

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Asset Managing Bank Accounts in Uncertain Times

One of the key responsibilities of the Asset Manager is to manage the cash and corresponding bank accounts associated with their real estate assets.  Since the cash flow performance of an asset is the true scorecard for  “for profit” properties, you can understand why this particular responsibility is critical. 

It is common for asset managers to supervise properties with hundreds of thousands if not millions of dollars going through the bank accounts every month.  However, managing bank accounts with balances in excess of the FDIC insurance limit can pose an agency risk to the asset manager.  This is a critical issue considering the current turmoil in the capital markets and instability of many local, regional and even national banks. 

The deposits in bank accounts are insured up to $250,000 by the Federal Deposit Insurance Corporation;  however, an asset manager should consider the risk associated with account balances in excess of this limit.   In response to the perceived risk associated with large bank deposits, the FDIC created theTransaction Account Guarantee Program to give security to depositors who have accounts with transactions in excess of $250,000.  Under this program, through December 31, 2009, all non-interest bearing transaction accounts are fully guaranteed by the FDIC for the entire amount of the account regardless of the balance.  For example, if you manage a bank account with a balance of $5 million and for some reason the bank fails, then the account is fully covered by the FDIC assuming that your bank carries this program and you have enrolled into the program. 

The Transaction Account Guarantee Program is in addition to and separate from the coverage available under the FDIC’s general deposit insurance rules.  Not all banks and financial institutions are participating in this program since there are additional costs associated with participation.  Furthermore, your bank accounts are not automatically enrolled in the program, thus you will need to have your bank accounts changed for enrollment.  The downside is that the deposits do not earn interest, but this is a small price for the safety of having the account fully insured.

Basic Responsibilities of the Real Estate Asset Manager

The asset manager fills a seminal role in the profitable management and performance of a real estate asset.  Within this role, the asset manager serves as a “fiduciary adviser” to the owner, with the responsibility to manage the business affairs of the asset.  The word “trust” is the key word when defining the role an individual plays as an asset manager.  The underlying magnitude of the economic and liability risk associated with owning commercial real estate is material, and the owner is “trusting” the asset manager to perform their responsibilities in a professional manner. 

Finding Gold in them “Foreclosed Property” Hills

There is nothing like the word “foreclosed property” that gets the blood of the entrepreneurial investor pumping.  Especially investors sitting on those hoards of sweet cash, that have contacted me recently about investing.  While we are seeing the foreclosure activity picking up in the commercial and multifamily arena, arguably most of these properties have fallen prey to the challenges imposed by years of capital starvation.  Crime, deferred maintenance, and undesirable tenant profiles…all spell risk and expensive corrections to get the property healthy and profitably operating again.  Because of these risks, there is well-deserved stigmatism attached to the word “foreclosure” that can cloud judgement when looking at an investment property.

Lender Workouts in Commercial Real Estate

I have been in close contact with various commercial lenders in the past year and the dialogue during the unprecedented capital markets collapse has been interesting. Add “lender workouts” to the list of challenges for the Asset Manager during this capital market meltdown.

We had numerous commercial loans mature in the past year and had planned to sell these properties in 2008 to pay off these loans. Unfortunately, the market did not cooperate. We were able to refinance a portion of these loans with various bank and other lenders; however, in several cases, we were not able to refinance these deals and were at the mercy of our lenders due to maturity defaults. Many other asset managers and owners have approached me sharing similar stories and wanting advise on how to manage “bad news” with their lenders.

Presentation on Crisis Asset Management-Harvard Business Club

On April 1st I was invited to speak to the Harvard Business Club-Atlanta, on the topic of Crisis Real Estate Asset Management.  As a landlord and career asset manager, I have been through 3 economic cycles affecting commercial real estate assets, and thus have been involved in working out many commercial income-producing properties with aggressive lenders, and nervous investors and tenants.  My experience is with virtually every property type from tree farms, hotels, botique hotels, office buildings, retail, single-tenant retail, class A, B & C apartments and warehouse.  This came in handy in the extensive questions/answer session with the audience at the end of this presentation.