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Third-party workouts gain as options.

There's no secret about it: every astute real estate professional knows there are extremely tough challenges ahead in New York City and its suburban markets. This is especially true for property owners and lenders who are trying to solve their financial difficulties.

Toward this end, they are utilizing an increasingly important solution -- the third-party workout, whereby owners and lenders hire professional real estate firms to work on their behalf to turn the troubled properties around.

Insufficient Income

Fueling the growth of workouts is the fact that many owners lack sufficient income to meet their property's debt service. There are a variety of reasons for this, including over-building. During the past years, many buildings in the New York metro area were built or acquired before landlords had commitments from major tenants. For many owners, this translated into a red bottom line.

Another problem is the fact that many tenants either have gone out of business or, for other reasons, have not been able to pay their rent. The result, again, is income loss.

Additionally, owners have incurred a substantial increase in expenses during the past 15 years, due mainly to local ordinances. Fire safety, asbestos abatement, indoor air pollution, and other concerns have become important issues among tenants and government authorities.

New laws focusing on these issues have forced owners to spend thousands of dollars beyond standard repairs to guarantee the safety and well-being of their tenants. No owner would argue that protecting tenants is vital; however, the result is a further eroded bottom line.

The Burdens of Debt Service

With increased expenses, less favorable tax laws, and diminishing incomes many property owners and investors are not in a position to meet loan payments. Consequently, they may face their lenders in a classic stand-off. The lenders threaten foreclosure; the owners threaten bankruptcy.

As I mentioned, one important and growing solution to this stand-off is the workout, with "third-party" firms such as Waldron Associates working on behalf of lenders and owners to help them more efficiently manage their troubled properties. For example, this includes providing assistance in restructuring debt, advising one or both parties in bankruptcy proceedings, negotiating new leases, marketing properties for sale, and reducing operating costs.

One key reason for the growth of tri-party arrangements is the need to buffer antagonism and distrust that may arise between lenders and owners during the cash crunch. The lender may have a host of suspicions, for example, about how much income is "really" being generated by the property; how that income is being spent; and why the debt service isn't receiving priority.

Integrity, Professionalism

are Key

The tri-party arrangement helps to mitigate these initial anxieties for both lenders and owners, and helps them reach effective solutions. The key is the integrity, impartiality, and professionalism brought to the table by the third-party firm.

In a sense, a tri-party arrangement often represents the first step for owners and lenders toward "making peace." Both sides agree that it's time to "put away the guns" and work things out.

Implicit in the arrangement is the owner's recognition of a financial problem with the property and his willingness to ensure full disclosure concerning cashflow and other pertinent data. The lender, on the other hand, recognizes the benefit of utilizing real estate professionals to assume the financial and physical management of the building.

It's important to emphasize that many lending institutions may not be staffed for a large number of workouts. Consequently, they need the expertise of a firm that can meet the diverse challenges of properly managing a building.

Bottom line: Lenders need to feel assured that, if they must accept the deed or foreclose, they are not obtaining an empty shell, but a viable property with clear title with which they can recoup their loss.

Benefits for Both Sides

Another attraction of the tri-party arrangement from the lender's stand-point is that the lender can maintain an arms-length position to avoid accusations of interfering in the owner's business.

Additionally, the tri-party arrangement can be extremely efficient. For example, a lender may, utilize the services of one real estate firm to manage workouts on several different properties.

However, the owner also benefits. He can concentrate on his financial problems, assured that a team of real estate professionals are efficiently managing the building, clearing up violations, collecting rents, leasing space, initiating marketing campaigns, implementing cosmetic changes that enhance the building's value, and more.

Two Key Requirements

For both lenders and owners, I feel that there are two key requirements to consider when employing a third-party real estate

First, the real estate firm must be candid and impartial with both sides. The arrangement ultimately will not work if one side feels that the real estate firm favors the other.

Secondly, both sides need a firm than can provide the kind of full service that will meet their property's particular needs. For example, if the lender and owner employ a large real estate firm, and the workout property is one of the smallest in the real estate firm's portfolio, the property may not receive the kind of attention it requires.

Team of Professionals

An effective workout is not the province of a traditional, transaction-oriented sales or leasing broker; it is a forum for a real estate team combining astute industry and financial skills with a broad business perspective. Nothing less will suffice. Additionally, if that team is supported by the latest technology -- including computer systems that enable lenders and owners to have on-site, ongoing access to daily cashflow information as we have at Waldron Associates -- all the better.

The most important point is that the tri-party arrangement is a practical way owners and lenders are attempting to solve their difficulties.

This is significant because it marks the return of real estate into the hands of professionals. Enlightened lending institutions and property owners are recognizing the need to hire experienced real estate executives and outside firms with the broad expertise and services outlined above.

In the end it is the result that counts; that owners and lenders find a way to preserve their property -- their most valuable asset -- before it is too late and a "win-win" situation becomes a "no-win" standoff.
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Title Annotation:Finance; professional real estate firms hired by owners and lenders to turn around troubled real estate holdings
Author:Mancini, John
Publication:Real Estate Weekly
Date:May 20, 1992
Words:1028
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