Damage control: goal of the 90's.

The 1990's have brought a new game to the real estate business. The only problem is that nobody knows the rules. The once glamorous Park Place and Boardwalk may no longer be viable properties because they may have gone to the bank once too often. Now Baltic and Mediterranean may be the best value on the board because they have not overleveraged themselves. Owners are struggling to hold onto their assets as overleveraging and freefalling prices are creating an unparalleled crisis. The scrambling that's taking place amongst developers, owners, co-ops, shareholders, and lenders is all focused in one direction - damage control.

Damage Control, a term heretofore relatively unknown and unused, has come to have a very personal meaning for anyone affiliated with the real estate business, even peripherally. Those of us on the management side find the range of new clients and the services which we must provide changing on a daily basis. It is no longer possible for a managing agent to merely be conversant with the financial structure of a property. The agent must fully understand mortgages, workouts, negative amortization, reduction of principal, foreclosures and last, but certainly reorganization on a property. Our clients have found that retaining a management firm with in-house counsel has been an invaluable service. There isn't a day that goes by without at least one of our clients calling me for legal and financial advice in connection with their financial status.

It has become critical for the managing agent to redirect the focus of the owners or cooperative boards of directors to the potential problems at hand. It is management's job to add value to property by ensuring that bills are timely paid and that the services needed to maintain the quality of life are not interrupted. I am always amazed to discover how many co-op boards and/or owners aren't aware of the real financial situation of their building - until it is too late. Currently, I am negotiating workouts for several properties which recently retained our firm as managing agent. Unfortunately, these buildings found out much too late that they were in serious trouble. It is only when they have retained new management and ask us to evaluate their budget and finances, that I see the crisis coming. Oftentimes, it is the sponsor who has adeptly disguised his default until the hour of reckoning. Other times it is a developer who refused to admit that things were not going to "turn around" shortly.

Many buildings have been over-mortgaged for years and it has finally caught up with them. As an example, our firm was appointed receiver last year for two office buildings in Middlesex County, New Jersey. The institutional lender had placed $2 million financing on two buildings which, today, are valued at $50,000. While the buildings were rented at 1985 rents, the borrower was able to meet the mortgage payments. Today, when the few tenants left are renegotiating their leases at drastically reduced rental payments, the buildings can barely support their operating expenses.

The crisis of the 1990's requires that lenders be astute in evaluating the true value of their portfolio properties and renegotiate their loans to realistic numbers. In order to avoid foreclosure or a Chapter 11 filing, all parties must take a long hard look at value and affordability. I recently finalized a workout between a coop in Queens and a local lending institution. The lender acknowledged that their goal was to "control the damage" and have a performing loan. By approaching the numbers realistically, I was able to restructure the mortgage on terms that were acceptable to the bank while at the same time provided the coop with a much-needed reserve fund and break-even cash flow. Most importantly, the deal does not require a large increase in maintenance. The co-op is now a viable, stable member of the bank s portfolio and the shareholders have apartments with real value both today and in the future. The damage has been controlled.

In the near future, we must see similar approaches to the mounting defaults and an honest, aggressive commitment to stabilization of properties. Working closely with a "value-added" management team can substantially enhance a trouble building's future.