Property assessments are key
Property Assessments Are Key In Measuring Value and Potential
By Randy D. Podolsky, SIOR, Managing Principal & Adam J. Tarantur, Assistant Vice President, Brokerage Division
There continues to be a trend of court appointed receivers taking control of commercial real estate properties. This scenario isn’t likely to change in the near term, and is expected to increase in numbers during the second half of 2010. While distressed property is a popular story in the press today, working on behalf of building owners and investors to ensure property investments remain viable has always been an emphasis for Podolsky Northstar CORFAC International.
For almost four decades we have worked with clients—individual and institutional owners, partnerships and private entities—advising them and guiding their thought process on how to maximize the value of their assets, whether the market indicates smooth sailing or turbulent waters.
When we assess or evaluate a property, whether as part of a new or ongoing assignment, we look at a number of key criteria and components:
- Is the property operating efficiently and effectively? Is there room to make cuts or consolidations in areas that will not materially impact the level of service desired? It may be possible to renegotiate contracts with service providers, or maximize the operating services provided. The consideration always must be whether those changes, and the corresponding reduction in operating costs, will be detrimental to the class of service being provided or the long-term value of the property. A proper balance of cost and service is critical to occupant satisfaction.
- Conduct a hold-versus-sell analysis. This would include return on investment (ROI) and carry cost analyses, to determine whether or not it makes sense to hold or sell the asset. Sometimes it just isn’t worth holding onto an asset, not because any type of distress is imminent, but because of myriad other factors. The uncertainty of future markets, the flux of real estate ownership and variables such as rent roll-overs, CAP rates, constants on debt and alternative investments require that this comparison be made often.
- Assess current leases and leasing potential. It is important to determine where value can be created. Are leases locked in at below market rents? Is there room for growth in rents that come with re-tenanting a property? What will future vacancies and turnover cost in terms of time and resources? What is the market, and are there any value-added opportunities? These are additional questions that need to be asked and answered.
- Assess maintenance programs. Planning for preventative maintenance measures and capital improvements can save time and money in the long run. Certain building components, such as parking lots, mechanicals, exterior facades and roofs, can be economically maintained annually. This saves significant long-term costs, without materially impacting the value of a property. The preventative measures we deploy can be undertaken without incurring significant expenditures that would drain cash flow and/or reserves.
The bottom line is that we strive to understand the objectives of ownership (whether it is a receiver situation that likely has a short-term strategy or an owner with a long-term hold strategy) in order to best deploy the operating scenario that suits the investment – and returns – optimally. Since owners and buyers have different strategies, it is important to view at acquisition time, and during the lifecycle of ownership, as a possible sale scenario. Thinking like a buyer and a seller simultaneously is key!
As we evaluate any property, we are keenly aware of, and on the lookout for, trouble spots. Those that serve as the precursor to bigger problems include:
- Underperforming revenue streams: The property is not operating at full occupancy; leases are below market levels or short-term, or do not match expectations or pro forma.
- Overrun operating expenses: The costs to operate and maintain the property have increased beyond budget or exceed reasonable norms.
- Unserviceable debt: The property cash flow is unable to meet debt-service obligations.
- No reserves or liquidity: Ownership is not financially capable of weathering market downturn.
Any one of those trouble spots is likely manageable; two occurring at the same time is problematic; and evidence of three or more represents “the perfect storm” in real estate.
Depending on the situations faced in today’s marketplace, and with proper planning, different courses of action can be taken. These fall into three distinct categories:
- Financial issues. There is no substitute for accurate and reliable budgeting and reporting; spending according to a plan; and being accountable for what you spend. Financial issues are critical because they impact every other operational aspect. Very tangible impacts of financial weakness are evidenced in the inability to complete new deals or lease renewals because of a lack of tenant improvement and commission dollars, or needed routine capital improvements. Deferred maintenance shows at the curb and will detract from leasing and sale potential. Owners need to portray they have maintained the property and have the ability to make and complete deals.
- Property management and physical plant. Practicing preventative versus reaction based maintenance allows ownership to be proactive and out in front of issues that could be of concern. Focus on preventing fires, not putting them out! Additionally, there are many government and manufacturer incentive and rebate programs to help landlords and tenants think green. Re-lamping existing fixtures and installing energy saving devices are low hanging fruit. Conversions to efficient alternative energy sources and products pay off as well. These are good programs that also provide financial benefit to the landlord or tenant and should be evaluated.
- Transaction oriented response. As previously stated, leasing versus sale strategies often require more in-depth review and analysis. From an acquisition perspective, the ability to acquire assets today at significantly lower values than two to three years ago appears very attractive. Today is a time to buy for use. The ability to be competitive in rents and have ample room for growth and value creation is the key to buying for investment. Both short and long-term consideration must be given in order to analyze if it is better to have a tenant in place, or to wait for the market to turn.
Regularly assessing a property and its investment stability, regardless of market conditions, is one of the most important activities a real estate advisor can perform. It will measure value and potential, creating an investment road map for property operations and ownership that will be sound and meet or exceed set objectives.