As Landlords, Banks Need Help

Article excerpt

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. …