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!

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

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.

An effective asset manager aligns their objectives with the owner’s objectives.   Thus the first order of business of an asset manager when assuming asset management responsibilities, is to clearly define the objectives of the owner.  Once the owner’s objectives are clearly defined, the asset manager will then build the asset management business model around these objectives.  For example, if the owner’s objectives are to hold an asset for profit for (say) ten years, then the asset manager will structure the business model to generate long-term profits within the expectations of the owner. If the owner is a lender who obtained the property from foreclosure and has the objective is to maximize the value of the property in a short timeframe and liquidate to cover it’s loan balance, then the asset manager will organize a business model targeted to achieve this objective

Although the role of the asset manager can vary depending on the owner’s objectives and unique characteristics of the asset, there are several basic mnanagement components that are universal in the administration of a real estate asset that constitute the fundamental role and responsibilities of the asset manager.  These  nine responsibilities are as follows:

1.  Supervision of the property management company;

2.  Supervision of the leasing/marketing company;

3.  Cash flow and bank account management;

4.  Reporting requirement and timing;

5.  Liason with tax advisors for appropriate taxation program;

6.  Physical condition/capital improvements;

7.  Hiring and supervision of  third-party professionals (attorneys, appraisers, engineers, etc.)

8.  Supervision of refinancing, sales and purchase activity;

9.  Contract compliance (leases, loan agreements, service contracts)

The asset manager serves a distinguished and critical role as a fiduciary for owner in professionally managing real estate assets.  Although each real estate asset is unique in terms of location, physical characteristics and ownership agenda, there is an overlying operations structure common to all real estate assets.  This operational structure can be separated into nine distinctive responsibilities.   Additional information for each of these nine responsibilities will be forthcoming.  I would appreciate any comments.

Occasionally, however, we will come across a foreclosed investment property that is a diamond in the rough.  Yes, you have to kiss many of those toads to get the prince…but it is almost poetic when you finally get to the altar with one.  

Many investors tend to think that all foreclosures are alike…but nothing is further than the truth.  Some perfectly healthy properties foreclose due to ownership illness or death, lacking a competent family member to take over management or understand the consequences of not paying the mortgage.  I’ve seen a few of these that have landed on the courthouse steps and traded at a price well below the actual value.  Others foreclose due to ownership dysfunction or political reasons.  I’m seeing a few of these right now as well, where the owners are too spooked by the capital markets and unable to make a joint decision to put in the financial resources to keep the properties going.  Several of these deals have positive equity.

We have bought several foreclosed deals that were 100% leased to  credit tenants, at a fair price (not bargain basement), that were publicly marketed through national brokers.  We were able to get these deals because most of the viable buyers were spooked by the “foreclosure” stamp in the  history books, and only interested if the price spelled ”bargain”.   After we were able to flip these properties at enviable profits, my colleagues would kick themselves for not buying when they had the chance. 

On the flip side, there are foreclosed properties out there that I would not pay even $1 to purchase.  Yet, there are lines of investors willing to make offers just because “it is a good deal” in terms of price. 

If you want to find gold in them “foreclosed property hills”, you need to be patient and persistent, and not mentally stigmatize the property just because it is a foreclosure.  You need to make sure that you undertake the risk of ownership of the property by undertaking a thorough due diligence.  If you don’t know what your doing but still want to buy, then surround yourself with the experienced, trustworthy people who are not afraid of a stigmatized properties.   You also need to really understand the risk of these deals and not invest just because the purchase price is attractive.  Yes, times in the commercial and multifamily investment world are tough right now, but there has never been a better time to search for the gold.

Does anyone want to comment or share their experiences?

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.

As early as last summer, lenders (and their boards) were still in denial of the impending meltdown and very much in the pass-the-buck mentality. These same large institutional lenders were aggressively pursuing their lender rights for default and outrageous penalties for loans in maturity default (which the borrower otherwise never missed a single payment in 10 years) while simultaneously whispering that yes…they too had closed down their multi billion-dollar lending operations and laid off their staff. I particulary enjoyed watching the Senate hearings where the CEO’s of the large banks were berated to grow a conscience and start thinking about the consequences of bullying borrowers for large fees and foreclosures, while sucking off TARP money.

I think that the message has stuck. With the impending tsunami of commercial maturities now making daily headlines, and forecasts of maturity defaults issuing dizzying consequences, I am noticing that lenders are developing a more accomodating attitude. It’s refreshing to say the least, that some smart lenders have acknowledged that working with a borrower, especially one that has an excellent payment track record, is preferable to owning yet another commercial property. Most savvy asset managers and owners know what they are doing, and will manage their properties out of this crisis. I appreciate dialogue with the smart lenders who are reasonable with the situation and recognize that the borrower in a maturity default is not the enemy, rather the partner who is motivated to work through to an amiable solution to get their loan paid.

The Harvard Business Club audience was a well-healed group of quality professionals, from a diverse group of professions – predominately in financial services and real estate.  What surprised me was the number of audience participants who were looking to change careers and get into real estate asset management.  Many were developers who had a good understanding of real estate from a developer perspective….and wanted to expand that experience into the asset management career. 

My advise to these individuals was to grow your career from your position of strength.  If your experience is development, there are many asset management positions that center around development.  For example, banks that have taken over partially developed sites through foreclosure.  Many of the banks are hiring professionals with this type of experience, and giving them the title of “Asset Manager”.  Also, there are many properties that are coming on the market “for sale” that need major renovations.  Developers can team up with financial guru’s and put their combined talents towards buying properties that can be value engineered through an intelligent redevelopment/rehab.  A few of the participants immediately got the jest of the opportunity. 

The presentation centered around managing income-producing real estate during an economic recession.  There are nine critical areas of responsibility that encompass the role of the real estate asset manager, and the presentation went through each one of these nine areas with a summary of challenges during a down-market.    Understanding the psychology of your (the asset manager’s) circle of influence is critical to sucessfully managing the assets.  For example, know that your client/investor is very nervous about their investment.   Accordingly, you should heighten your reporting to your client/investor with a strong asset management plan demonstrating the toolbox to manage your property to survive.   I also suggest telling your circle of influence the truth about the key areas of the risk of owning real estate assets.  The circle of influence includes your investor/client, lender, tenant, vendors and employees.  A copy of this presentation is attached to this blog.  More suggestions on how to manage properties in times of crisis is forthcoming.

Marjy

Crisis Asset Management-Harvard Business Club